With Rising Oil Prices, US Shale Companies Accumulate Cash... Favoring Dividends and Share Buybacks Over Investment

[Photo by Reuters]

[Asia Economy Reporter Byunghee Park] Thanks to rising oil prices, large amounts of cash are expected to accumulate for U.S. shale companies.

Consulting firm Rystad Energy projected that if current oil prices hold, the U.S. shale industry’s free cash flow this year will reach $180 billion (approximately 231.3 trillion KRW), according to major foreign media reports on the 16th (local time). According to S&P, $180 billion is estimated to be much more than the profits earned by the shale industry over the past 20 years.

Raoul LeBlanc, head of S&P’s North American oil and gas sector, described it as an enormous amount of cash that can almost clear impaired assets on the balance sheet.

The war in Ukraine has ironically become an opportunity for shale companies. Oil and gas prices have risen, and the White House has lifted restrictions on oil and gas drilling on federal lands. The Biden administration resumed oil and gas drilling on federal lands to enable more domestic production, replacing imports of Russian crude oil and gas.

As a result, the number of drilling rigs in the shale industry has increased, and daily crude oil production in the shale sector has risen by 11.8 million barrels. However, it still falls short of the pre-COVID-19 pandemic peak of 13 million barrels.

Shale companies plan to use the increased cash for capital expenditures such as dividends, debt repayment, and share buybacks rather than increasing oil and gas production.

This is interpreted as a reflection of past difficulties caused by overproduction and strong opposition to shale development due to environmental concerns.

Nick DeIorio, CEO of Chesapeake Energy, said, "It will be different from the past," adding, "We will spend the increased cash to maximize shareholder value rather than maximize growth."

Chesapeake Energy filed for bankruptcy protection in June 2020 and emerged from bankruptcy protection in February last year. In the first quarter of this year, it generated a record free cash flow of $532 million. Chesapeake plans to pay out $7 billion in dividends over the next five years, which is more than half of its current market capitalization.

Vicki Hollub, CEO of Occidental Petroleum, also said last week that there are considerable headwinds to increasing production.

Occidental announced it will reduce debt with the increased cash. Occidental’s debt rose by about $50 billion after acquiring competitor Anadarko at the end of 2019.

Occidental also announced plans to resume dividends starting in the second quarter. Occidental’s stock price has risen 150% over the past year.