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Energy Sector Instils Confidence With Booming Buybacks

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The energy sector is currently looking bright after witnessing impressive year-over-year earnings growth of 157.2% driven by 23.8% higher revenues in the last quarter. In fact, among all the 16 Zacks sectors, energy was the only one that witnessed triple-digit earnings growth in the October to December quarter. The sector generated $39.3 billion in earnings through 2017. Recovering commodity price and successful cost-cut strategies adopted during the slump period aided it in delivering stellar results.

More importantly, the companies were able to cover their investment and payouts with cash from operations — a quality that investors really desire in stocks. In fact, riding on improving commodity prices, stronger production outlook and healthier cash flows, the companies look poised to continue the momentum in the coming years. Notably, we expect energy to report profit of $66.9 billion and $72.6 billion in 2018 and 2019, respectively.

The companies are set for more cash generation and the top priority of most of the CEO’s is to seamlessly shift from cost-containment efforts to boosting shareholder value with dividend hikes and share buybacks.

Pricing Gains and Cost Cuts Drives Energy Players

With the crude markets having recovered from the historic lows and comfortably trading above $60 a barrel since a couple of months, the impact of improving energy landscape is clearly visible on the oil majors. Unlike other short-lived rallies over the past three years, we believe that the current higher oil prices are a result of improving fundamentals. Declining inventories, bright demand outlook and the extension of OPEC-led supply cuts until the end of 2018 are the major factors helping balance the market and supporting the strong uptrend.

The companies have also reaped benefits of cost-containment strategies adopted during the historic downturn period. They focused on realigning their business models to a more lean and efficient structure so as to stay competitive in the long run.

As evidenced by the stellar full-year results, it won’t be a stretch to say most of the major energy companies have successfully come out of the slump. In fact, the resilience to reduced crude prices has made the stocks more durable as they are not just surviving but thriving at $50 a barrel threshold mark.

Robust Cash Flows Fuel Shareholder Rewards

Leaner strategies adapted by the company during the industry downturn including reducing headcount, streamlining operations, divesting non-core projects, slashing capex, dividend, buyback programs and operating costs are all yielding desired results.

Thanks to the rebounding prices and strategic initiatives, cash flow from operating activities — which is a key metric to gauge the financial health of the firms — was the highest in 2017 since the downturn period. Having positive cash flows indicates enhanced liquidity, giving the company more power for debt repayment, expenses, dividend payouts, stock buyback and reinvestment in business.

The companies generated enough cash to pay off debt along with funding capex and dividend payments. Further, the energy stocks look poised for growth and greater investor rewards.

Buybacks Boost on Robust Business Scenario

Amid higher oil prices, robust cash flows and other strategic initiatives, energy players are now inclining toward bolstering shareholder returns through buyback programs. With the buyback, the companies will be able to overcome the dilution problem under their scrip dividend policies adopted during downturn that entitled the investors’ options for choosing stocks as payout instead of cash.

Delivering solid results, BP plc (BP - Free Report) became the first European supermajor to recommence buybacks after 2014, when repurchases were stalled as crude price started declining on supply glut woes. Per the program, the European energy giant planned to repurchase a maximum of 1.96 billion shares between Nov 15, 2017 and annual general meeting 2018.

Following BP closely, Royal Dutch Shell plc (RDS.A - Free Report) also announced its plans to buy back shares of at least $25 billion by the end of 2020 owing to brighter prospects and improving cash flow generation.

In late 2017, Hess Corporation (HES - Free Report) also declared a $500-million stock buyback plan. Additionally, this month, it announced a new share repurchase plan after receiving authorization from its board of directors. Per the plan, through 2018, the explorer is likely to buy back shares worth $1 billion. The recent announcement reflects the firm’s strong commitment toward returning cash back to stockholders on a regular basis.

Last month, TOTAL S.A. (TOT - Free Report) also announced plans to buyback up to $5 billion shares over the period of 2018-2020, thanks to the improving energy landscape and solid 2017 financial results.

In February 2018, Noble Energy Inc. also declared a $750 million share purchase program to be executed through 2020. Pioneer Natural Resources Company also joined the bandwagon of energy players who are resorting to share repurchase programs. The company will buy back about $100 million shares this year to offset the dilution related to the stock compensation plans.

In its annual analyst day this month, Chevron Corporation (CVX - Free Report) also hinted the resumption of share repurchase program. While the Zacks Rank #3 (Hold) company did not disclose anything specific regarding the program, it did signal that the increasing free cash generation through production boost and cost cuts may help it to carry out share buybacks sometime this year after a three-year long hiatus. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Just a day after Chevron signaled buyback plans, U.S. explorer Devon Energy Corporation also announced $1 billion buyback accounting to about 6% of its outstanding stock.

Amid improving environment for the U.S. energy sector, Anadarko Petroleum Corporation also announced $2.5 billion share buyback program extending through 2018.

However, ExxonMobil Corporation (XOM - Free Report) seems to have skipped the trend with no buybacks in the horizon at the moment. Nevertheless, while the company has not notified anything in particular about its buyback plans, it did mention that unless it utilizes its cash flows toward some strong growth opportunities, it might as well resume the repurchase program.

Bottom Line

Share buybacks represent a highly attractive return opportunity for the investors. Stock buybacks lead to a decrease in the number of outstanding shares for a company, boosting the earnings per share. With recovering energy landscape and improving financial picture of the companies, we can anticipate more energy players to focus on rewarding shareholders with compelling buyback programs.

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