Colloquy: Energy and Capital: Operators reinvest cash

July 21, 2014


Business is good in the oilfield, and as increased production and steady commodity prices contribute an influx of cash, operators are reinvesting in themselves, expanding their share buyback programs. Management usually says that the share repurchases create long-term value for shareholders, reducing the total outstanding shares of the company.

Buybacks are also a mechanism used when stock prices are perceived to undervalue company assets.

Burgeoning cash balances from stable production revenues and company streamlining through asset divestment support most share repurchase programs.

Buyback programs usually result in a rise in share price, one way of returning wealth to shareholders, in addition to paying regular dividends. The programs also garner favorable responses from financial analysts and positive market buzz.

For smaller companies, however, shareholders may question whether the company is retaining enough free cash to grow their operations.


According to The Energy and Capital newsletter from Angel Publishing: “There’s a steady liquidation of the world oil industry... Exxon is buying back about US$30 billion of its shares each year. If that continues, Exxon will have repurchased all its stock by about 2024.”

The same article goes on to say that the Big 5 (Exxon, Chevron, BP, ConocoPhillips and Royal Dutch Shell) are spending more on stock buybacks than they are on finding new oil.

Anglo-Dutch Royal Dutch Shell buys back about half a million of its own ‘A’ shares daily, although it’s worth noting that there are just short of four billion ‘A’ shares outstanding.

In March, Shell announced a buyback program for ‘B’ shares in April, saying “the purpose of the share buyback program is to offset dilution created by the issuance of shares for the company's Scrip Dividend Program. At this time, it is less economic for the company to purchase ‘A’ ordinary shares under the share buyback program due to Dutch dividend withholding tax rules.”

BP has been reaquiring its shares for several years. After announcing it would sell its 50% stake in Russian TNK-BP a year ago, it also announced an $8 billion share buyback program.

In April, BP Chief Executive Bob Dudley said more share buybacks were planned, as the company also increases its quarterly dividend payments.

In March, Chevron Corp. said its dividends and share repurchase program would be internally funded by 2015-2016. The company told analysts it expected its operating cash flow to grow from $35 billion in 2013 to above $50 billion in 2017, driven by 20% production growth over the period and improved cash margins. It plans to monetize about $10 billion assets from 2014 to 2016 (20% midstream, 80% upstream).

Marathon Oil Corp. is pursuing a two-stage, billion dollar program to buy back common shares. The first stage, buying up $500 million of stock, was completed last year. The second phase is an additional $500 million in share buybacks, fully funded by the divestment of the

Marathon’s 10% ownership in offshore Angola Block 31 to Sonangol Sinopec International Ltd., a subsidiary of China’s Sinopec, for about $1.5 billion.

Eni SpA has been buying back shares, and although as of late April, it held nearly 22 million shares, this represents only 0.60% of the share capital.

Middle East

Dragon Oil, the cash-rich explorer that is controlled by Dubai’s Emirates National Oil Co. has production assets off Turkmenistan. In September 2011, it began buying back shares. Then in June 2012, it launched a $200 million share buyback program to repurchase up to 5% of its outstanding shares.


Australia’s Murphy Oil Corp. has followed a steady share buyback strategy, completing a $1 billion program last year, and an additional $250 million in 1Q 2014.

Murphy’s board of directors approved a new share repurchase program in May that allows the company to repurchase up to $125 million in shares of common stock. No details announced, but the company will complete by the end of this year.

Woodside Petroleum Ltd. recently announced it was buying 9.5% of its outstanding stock from Shell for US$2.68 billion, based on a share price of AU$36.49, a “14% discount to volume weighted average price up to and including 16 June 2014.” Shell sold another 9.5% to institutional investors. 

Service companies

Luxemburg-based Subsea7 SA has been buying back shares through 4Q 2013 and 1Q 2014. At the end of 2013, it held indirectly about 4% of issued shares, in addition to shares held in an employee benefit trust. OE