Oil and natural gas reserve replacements are falling, but leading cash-rich producers like ExxonMobil, Royal Dutch Shell, BP plc, ConocoPhillips, Anadarko, Kerr-McGee, EnCana and Devon Energy are investing a lot of money into huge share buybacks. Some analysts have questioned whether more of the excess money should go into the exploration for new resources — which is still taking a hefty chunk of the cash — but companies cite a lack of profitable targets. Meanwhile, investors are reaping the benefits in larger dividends and stronger companies.
In the first quarter alone, eight North American producers covered by Lehman Brothers’ analyst Thomas Driscoll purchased $2.3 billion in shares in the first quarter, averaging 2.1% of their outstanding shares (see Daily GPI, May 6, 2005). The trend, as service costs continue to rise, appears to be accelerating.
Part of the problem is that most of the remaining large projects suitable for development by major oil companies are under the jurisdiction of unfriendly governments. Chairman David Morrison of the Wood Mackenzie consulting firm in Edinburgh, told a group recently the majors’ top management is being told by its exploration chiefs that they shouldn’t increase the exploration budgets because they don’t have enough quality exploration targets. The exploration departments also say that companies shouldn’t expect 100% reserve replacement from their exploration department. Instead, 75% would be more likely. “Their reserve replacement has lagged significantly behind production. It worries them,” Morrison said.
One of the more aggressive share buybacks has been at Shell, which is targeting a $3-5 billion program this year. The company said its buyback plan would be in the upper range “given strong cash generation for the first half,” with a cash flow from operating activities of $15.0 billion during that period. The offer is part of the strategy between Royal Dutch Petroleum Co. and Shell Transport & Trading Co., which joined the two companies into one in July.
Investors welcome the move, but analyst Antoine Leurent said he’s not impressed. “Buybacks aren’t satisfying. They show the company is unable to find more projects to invest in, be they for external or internal growth,” he said in a note to clients in August. Leurent pointed to Shell’s disappointing output in the second quarter, “while the barrel [of oil] stands at $60.” Shell’s production was down 1.5% from the same period a year ago.
ExxonMobil, the richest public oil company, increased its capital expenditures $950 million in the second quarter from a year ago, but also purchased $3.7 billion of shares in the quarter, including $3.5 billion to reduce common stock outstanding. The share buyback was a $1.0 billion increase from the $2.5 billion of share reduction purchases in the first quarter. As a consequence of the continued strengthening of its financial position, Exxon said its share purchases to reduce shares outstanding will be increased to $5.0 billion in the third quarter.
At Devon, the CEO said that the share buybacks make sense. Earlier this month, CEO J. Larry Nichols announced that Devon was launching its second share repurchase program, reflecting “our focus on building value per share and the abundant free cash flow Devon is generating in today’s environment” (see Daily GPI, Aug. 4). Nichols said the repurchase program offered more value than any acquisitions.
In the second quarter, Devon repurchased 21.5 million shares of its common stock for approximately $1 billion. At the beginning of this month, the company had completed its targeted 50 million share repurchase program, which was first announced in September 2004.
“We don’t view the acquisition of Devon’s shares as any different from buying another company’s shares,” said Nichols. “At the moment, we’ve announced our second share buyback and we will use it to reduce debt…If we find an exception to that, we’ll do it, but until then, we’ll buy back our own shares.”
Another aggressive share buyback is underway at EnCana. The company bought about $1.3 billion of its shares in the first six months of this year, reducing the outstanding number by about 4%. However, it has no plans to slow down, and it recently filed an amendment to continue its share repurchase program.
“EnCana’s 2005 non-core divestitures are expected to bring in substantial funds, and our capital program is expected to be funded by operating cash flow,” said CEO Gwyn Morgan, during a 2Q2005 earnings conference call. “EnCana’s 20 million net acres of undeveloped North American land contain unbooked resource well beyond our proved reserves. Therefore, we believe this amendment to our bid will provide the opportunity to further increase net asset value per share.” With the share repurchase, which will expire on Oct. 28, the Calgary-based producer is entitled to purchase up to an additional 24.9 million common shares. The price to be paid will be the market price at the time of acquisition.
Byron Grote, CEO of London-based BP, said the company’s surplus cash it will hand back to investors this year is likely to exceed $17 billion — at least 21% more than the cash distributions in 2004.
BP has pledged to repurchase at least $6 billion worth of shares in the second half of this year, taking the total for the year to $10.1 billion. It also raised the second dividend by 26% to 8.925 cents/share, lifting the first six month total by 26% to 17.425 cents. In its 2Q2005 results, BP reaffirmed plans to return $23 billion to shareholders in 2005 and 2006 through increased dividends and share buybacks. This was despite an upgrade in its 2005 capital spending to $14.5 billion from $14 billion, to reflect the cost inflation brought about by surging oil prices in the world market.
Anadarko, based in Houston, began an aggressive restructuring campaign last year, by selling off assets and using the proceeds to pay down debt and buy back stock. CEO Jim Hackett said a few weeks ago that the company acquired another 1.8 million shares in July for $160 million, bringing the total shares repurchased to 24.7 million shares for $1.7 billion, or a net average cost of $67.50/share, since the $2 billion program was authorized in June 2004.
ConocoPhillips also has boosted its stock repurchase program, authorizing an additional buyback of $1 billion of the company’s common stock over the next two years. The company noted the new repurchase plan is in addition to an existing $1 billion program begun in February. From the February authorization, the company said it has already repurchased about $950 million of its common stock. The new program, it said, will be used to offset dilution from its stock-based compensation programs.
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