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Lehman Finds E&P Share Buybacks Accelerate

The increasing maturity of North American oil and natural gas basins, combined with strong prices, have left many exploration and production (E&P) companies with more cash flow than places to use it, and many are taking the money to buy back shares, according to a research note by Lehman Brothers.

Analyst Thomas Driscoll wrote that E&Ps are "in a situation where cash flow far outstrips the ability to profitably redeploy that cash flow via the drill bit." Instead, some E&Ps are choosing to redeploy the extra cash via acquisitions "while others have claimed that acquisition returns have deteriorated as a result of the tremendous amount of cash chasing a limited set of investment opportunities. As a result, we have seen increased share repurchases in the recent past."

Driscoll noted that "increased drilling activity has hurt share price performance over the past four years," and "North American oil and gas basins offer insufficient attractive drilling opportunities given the ample cash flows at current prices."

Eight of the North American producers that Lehman follows repurchased $2.3 billion in shares in the first quarter, he said. "On average, these companies repurchased about 2.1% of shares outstanding," and "we expect the rate of share repurchases to accelerate."

In the first quarter, Devon Energy repurchased 12.7 million shares for $557 million, while EnCana Corp. repurchased 11 million shares for $669 million, according to Driscoll. Talisman Energy repurchased eight million shares for $240 million, and Pioneer Natural Resources repurchased about three and a half million shares for $152 million.

Meanwhile, Kerr-McGee Corp. repurchased just over three million shares for $250 million in the quarter, while Burlington Resources has repurchased four million shares for $186 million. Also making large share repurchases were Anadarko Petroleum, which repurchased two and half million shares for $197 million, and Pogo Producing, which repurchased more than one and a half million shares for $81 million.

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