U.S. oil producers increase shareholder returns amid operational costs increase

In the first quarter of 2022 (1Q22), 53 U.S. exploration and production (E&P) companies reported both higher revenue, resulting from increasing crude oil prices, and higher material and labor costs caused by supply chain limitations. According to statements in quarterly reports and investor presentations, many of these companies continue to keep capital expenditure below the 2017–19 quarterly average to allocate more funds to financing activities, such as dividends and share repurchases. As crude oil prices and returns on investment rise, the aggregate valuation for these companies has increased to just below the previous five-year (2017-21) high.

We base our analysis of the E&P sector on the published financial reports of 53 publicly traded oil companies that produce a majority of their crude oil in the United States. As a result, our observations do not represent the sector as a whole because the analysis does not include private companies that do not publish financial reports. In 1Q22, these 53 publicly traded companies collectively produced 3.9 million barrels per day (b/d) of crude oil in the United States, or about 34% of all U.S. crude oil produced in the quarter.

The West Texas Intermediate (WTI) crude oil price averaged $95.18 per barrel (b) in 1Q22, an increase of $37.09/b (64%) compared with 1Q21 and $17.91/b (23%) compared with 4Q21. Cash from operations for the E&P companies was $25.7 billion in 1Q22 (Figure 1), which is an $11.8 billion (86%) increase from 1Q21 and a $2.6 billion (9%) decrease from 4Q21. An unusually high $8.8 billion increase in receivables, the balance due for delivered goods not yet paid for by customers, contributed to the quarterly decrease. Production of crude oil remained flat compared with 4Q21, and it was 364,000 b/d (10%) higher than the first quarter of last year. Compared with pre-pandemic levels, production in 1Q22 remained 430,000 b/d (10%) less than in 1Q20. Capital expenditure nearly doubled year-over-year to reach $14.6 billion in 1Q22. These companies reported a decline of $708 million (5%) in capital expenditure compared with last quarter.

Continuing to return more capital to shareholders, these companies spent $8.6 billion on shareholder distributions (combining gross share repurchases and dividends) in 1Q22, slightly below the five-year high recorded in 4Q21 (Figure 2). Compared with pre-pandemic levels (between 1Q17 and 1Q20), when shareholder distributions averaged 22% of cash from operations, shareholder distributions in the last two quarters increased to more than 30%. Although both dividends and share repurchases represent shareholder distributions, they are classified as different uses of cash. Dividends are direct cash payments to shareholders and are typically steady from quarter to quarter. After reducing dividends in 2020, these companies more than doubled their dividends from the pre-pandemic average of $1.7 billion to $5.1 billion in 1Q22. Share repurchases provide less direct benefits to shareholders than dividends. Instead of cash payments, a company may repurchase its own shares to reduce the number of shares available on public markets, which could increase the stock price for existing shareholders (although evidence for this effect is mixed). Share repurchases tend to be less consistent than dividends. For these companies, quarterly share repurchases declined to almost zero at the height of pandemic disruptions in mid-2020, but have since increased rapidly, averaging $3.7 billion for the last two quarters.

As a result of both higher oil prices and increased returns on capital, the market capitalization for these E&P companies has increased. Market capitalization provides a market value of a public company based on the current market price of its shares and the total number of shares held by investors. Changes in market capitalization are largely attributed to share price changes. Using this valuation method shows the E&P companies have recovered and surpassed the value lost when disruptions at the beginning of the COVID-19 pandemic caused their aggregate market capitalization to fall to $130 billion (Figure 3). In 1Q22, aggregate market capitalization reached $573 billion, increasing 42% over 4Q21. During the same period, the S&P 500’s overall market capitalization fell by 5%. We excluded companies that became public after 1Q17 to allow for historical comparison.

Although rising crude oil prices have increased revenues, supply chain issues and financial losses from hedging contributed to increased costs. Production expenses such as the cost of goods sold, operating expenses, and production taxes totaled $28.06 per barrel of oil equivalent (BOE) in 1Q22, 59% above the pre-pandemic average and the most in the last five years (Figure 4). Cost of goods sold, which includes the cost of materials and labor directly used in production, are now more than double the pre-pandemic average. A recent survey of oil and natural gas firms by the Federal Reserve Bank of Dallas found 94% believe supply-chain issues are having a negative impact on their firm, with 66% expecting that it will take more than a year to resolve these issues. In addition, crude oil price increases in 1Q22 resulted in a net loss from hedging derivatives of $14.5 billion or $15.54/BOE. Hedging is a risk management strategy to smooth revenue outcomes by using futures and options to reduce financial losses from crude oil price declines. Companies can experience financial losses from hedging when crude oil prices increase, although these losses can be offset by the higher revenue generated from selling crude at higher prices.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.