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Flush With Cash, Oil Companies Focus on Shareholder Returns

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As the energy space continues to recover from last year's blows, some of the world’s biggest oil companies have started generating healthy cash flows. After a dire 2020 — devastated by the pandemic-induced demand destruction and price plunge — the sector components have shown significant improvement in profits over the past few quarters.

Ballooning Cash Flows

The sharp increase in crude prices from the depths of minus $38 a barrel in April 2020 to around $70 has allowed the energy companies to deliver a solid financial performance. In particular, cash from operations is on a sustainable path as revenues improve and companies slash capital expenditures from the pre-pandemic levels amid sharply higher commodity prices. To put it simply, the environment of strong oil prices has helped the big energy operators to generate significant “excess cash,” which they intend to use to boost investor returns.

Let’s have a rundown on how some of the oil biggies are allocating the increasing cash pile toward stock buybacks and dividends.

Share Repurchases

British energy major BP plc (BP - Free Report) , which had a solid start to the year after comfortably beating first and second-quarter earnings estimates, announced plans to buy back $1.4 billion worth of shares by utilizing surplus cashflow that was generated through the January-to-June period.

Continental rival Royal Dutch Shell (RDS.A - Free Report) launched a $2 billion stock repurchase program to be completed by the end of 2021. France’s TotalEnergies (TTE - Free Report) said that it it will spend up to 40% of the additional cash flows generated at a $60+ oil price environment to share buybacks.

American supermajor Chevron (CVX - Free Report) revived its stock repurchase program and vowed to buy back $2-$3 billion in shares annually starting from the third quarter.

A leading oil and gas producer in North Dakota’s Bakken Shale, Continental Resources (CLR - Free Report) resumed its stock repurchase program of $1 billion, which began in second-quarter 2019.

Dividends

Royal Dutch Shell increased its quarterly dividend by 38.3% to 24 cents per share, while Zacks Rank of #1 (Strong Buy) BP’s board of directors approved a dividend hike of 4% in the June quarter to 5.46 cents per ordinary share. Staying with the ‘Big Oil,’ Norway’s Equinor ASA (EQNR - Free Report) proposed a quarterly dividend of 18 cents per share, representing a hike of 20% from the prior payout.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Continental Resources announced a quarterly fixed dividend payment of 15 cents per share, which increased from 11 cents per share in the previous quarter. Permian pure play Diamondback Energy (FANG - Free Report) also boosted its quarterly dividend, announcing that it will go up 4.5% to 45 cents. Besides, Houston, TX-based Marathon Oil increased its quarterly base dividend to by 25% from 4 cents to 5 cents per share, signalling its commitment to shareholder return

Another upstream operator Ovintiv raised its quarterly dividend by around 50% to 14 cents per share. Meanwhile, Devon Energy, which added a variable dividend component to its fixed payout last quarter, has promised to shell out 44% more this time. Shale behemoth Pioneer Natural Resources Company brought forward the timing of its special dividend by six months and will pay nearly 75% of the company’s free cash flow after the payment of the base dividend.

Wrapping Up

A much-improved crude price scenario and the economic recovery have contributed to the balance sheet strength of the energy companies. Benefiting from the robust fundamentals, their cash from operations are now covering capital spending. This provides a sustainable financial framework for the oil firms to increase cash returns to shareholders.