More than a year ago, U.S. shale producers started to realize that investors were getting impatient about meager returns from the industry that was pumping record volumes of oil without sufficiently rewarding those shareholders that had stuck with it through thick and thin.
Some independent U.S. drillers have started to increase dividends that were either slashed or frozen as a result of the oil price slump in 2015 and 2016. Others combined higher dividend payouts with share buybacks to further boost investor returns as oil prices rose in 2018 and drillers realized that growing value is now more important to shareholders than growing volumes at all costs.
The trend of growing dividends among independent U.S. drillers is set to continue this year and more companies are expected to hike their dividend payouts, Matthew DiLallo with The Motley Fool argues.
Yet, despite a year of a general trend in the industry of boosting dividends and share repurchases, the stock prices of North America’s companies have underperformed both the market and the rise in crude oil prices.
In addition, U.S. shale drillers have to perform a very delicate and often very complicated balancing act between growing production, trying to pay down the debt they have amassed to grow said production, and pleasing shareholders with higher returns. At the same time, the once-eager shale industry backers on Wall Street have started to back away as the Street has become increasingly unwilling to continue financing en masse the drilling frenzy that has failed to deliver consistent returns. Last year, equity and bond issues by U.S. drillers slumped to US$22 billion—the lowest level since 2007, according to Dealogic data carried by The Wall Street Journal.
While boosting dividends is surely a sign that U.S. shale is starting to pay more attention to shareholder demands, increased payouts do not necessarily mean that the industry is back in favor with either the stock market or investors and financial backers.
Devon Energy, for example, slashed in Q2 2016 its quarterly dividend from $0.24 per share to just $0.06 per share in response to the low oil prices. This year, the company is raising the quarterly dividend to $0.09 per share as of Q2, boosting its share buyback program, simplifying the asset portfolio, and promising that it will be “able to grow oil volumes at a mid-teens rate while generating free cash flow at pricing above $46 per barrel.”
EOG Resources is also lifting dividends.
“EOG’s commitment to increasing cash returns to stockholders continues, as we have now increased our dividend by 72 percent during the past 14 months,” chairman and CEO William R. Thomas said at the Q1 2019 results release earlier this month.
Pioneer Natural Resources boosted its semiannual cash dividend from $0.04 per share to $0.32 per share between February 2018 and February 2019, and plans to further increase its dividend to an annual yield of around 1 percent per share, or in a range of $1.50 to $1.75 per share.
In the form of share buybacks and dividends, “even the most stressed North American independents returned close to US$25 billion in 2018,” Deloitte said in an analysis of the E&P companies’ performance during and after the 2015-2016 downturn. North American independents have also greatly reduced operating costs, by more than US$15/boe to about US$35/boe, achieving these gains with a much lower capital expenditure, Deloitte’s Anshu Mittal and Thomas Shattuck wrote.
Nevertheless, the stock market hasn’t rewarded oil companies even after the oil industry, including shale drilling, started to recover, according to Deloitte.
“All the four company groups (North American pure-plays, international independents, integrated oil companies, and national oil companies) have underperformed oil prices by 10–50 percent, especially North American upstream companies,” Deloitte said last month.
This year, U.S. shale will have a hard time simultaneously rewarding shareholders and paying down debt, according to research firm Rystad Energy.
“Despite a significant deleverage last year, estimated 2019 free cash flow barely covers operator obligations, putting E&Ps on thin ice as future dividend payments remain in question,” Rystad Energy senior analyst Alisa Lukash said at end-February.
“The obvious gap in expected versus likely dividend payments confirms the industry’s inability to deliver sustained investors’ payback while simultaneously deleveraging,” Lukash noted.
Independent U.S. drillers are likely to favor value over volume this year as investor pressure for higher returns, capital discipline, and positive free cash flow is greater than ever, Wood Mackenzie said earlier this year.
At WTI Crude prices above US$50 per barrel, “shareholder distributions will be higher up the capital allocation pecking order than investing for growth,” Roy Martin from WoodMac’s corporate analysis team says.
Although low breakeven assets in some sweet-spot areas could be further incentives for investment in growth, WoodMac expects shareholders to take precedence in the distribution of surplus cash flow – “moderate dividend increases for some; buyback programmes for most.”