Big Oil eyes wave of buybacks after blowout earnings

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Crude oil futures have rallied to their highest finish in months, with WTI price climbing above $65 for the first time in two months after OPEC+ stuck with plans to gradually ease production curbs, signaling confidence in the demand outlook. The optimism has coincided with a breakout season for the S&P 500, with the Energy Sector (XLE) being particularly impressive.

Indeed, the fossil fuel sector is enjoying a rare blowout season.

The majority of companies in the energy sector have beat Wall Street earnings estimates, while more than 80% have managed to surpass revenue expectations.

With impressive bottom-line growth, many top energy names are returning more capital to shareholders in the form of share buybacks and dividends. Companies usually repurchase shares when they believe they are undervalued, a big positive for oil and gas bulls.

Here’s a rundown of Big Oil’s share buyback and dividend trends after the latest earnings season.

Share Buybacks:

#1. ConocoPhillips Last year, Houston, Texas-based shale producer ConocoPhillips (NYSE:COP) earned itself accolades after announcing some of the deepest production cuts at a time when many shale companies were reluctant to lower production and relinquish market share. The company lowered its North America output by nearly 500,000 bpd, marking one of the biggest cuts by an American producer. This year, ConocoPhillips has kept drilling activity subdued and also kept a tight lid on capital expenditures.

And those austerity measures are now paying off.

Conoco has become the first large U.S. independent oil producer to resume its share buyback program after suspending it during last year’s oil crisis.

Conoco says it has resumed stock buybacks at an annualized rate of $1.5B, and also plans to sell off its Cenovus Energy stake in the current quarter and complete the sales by year-end 2022. Proceeds from the sale–valued at ~$2 billion–will be used to fund share buybacks.

COP stock is rallying again after Bank of America upgrade the shares to Buy from Neutral with a $67 price target, calling the company a “cash machine” with the potential for accelerated returns.

According to BofA analyst Doug Leggate, Conoco looks “poised to accelerate cash returns at an earlier and more significant pace than any ‘pure-play’ E&P or oil major.” 

Leggate COP shares have pulled back to more attractive levels “but with a different macro outlook from when [Brent] oil peaked close to $70.”

But best of all, the BofA analyst believes COP is highly exposed to a longer-term oil recovery.

But BofA is not the only Wall Street punter that’s gushing about COP.

In a note to clients on Friday, Raymond James says the company’s stock price is undervaluing the flood of cash the oil and gas company is poised to generate.

That’s quite remarkable considering COP shares are up 39.3% in the year-to-date.

The bullish notes appear well-deserved. With WTI price in the mid-60s, ConocoPhillips would have little trouble generating copious amounts of free cash flows given the company’s cash flow breakeven level of under $30/bbl.

Strong earnings

Like many companies in the U.S. shale patch, ConocoPhillips printed a strong Q1 2021 scorecard with stronger than expected earnings.

The company swung to Q1 GAAP earnings of $1B, or $0.75/share, from a year-ago loss of $1.7B, or $1.60/share. Revenues more than doubled to $10.56B from $4.81B a year earlier.

Q1 production, excluding Libya, climbed 16.4% Y/Y to 1.49M boe/day, a good 30% above the 1.14M boe/day output in Q4 2020. Total average realized price clocked in at $45.36/boe, much higher than the $33.21/boe realized in Q4 2020, thanks to the ongoing oil price recovery.

COP issued upbeat guidance, saying it expects Q2 production, excluding Libya, of 1.5M-1.54M boe/day due to seasonal turnarounds planned in Europe and Asia Pacific.

Conoco has also announced plans to reduce debt by $5B over the next five years, which really is gilding the lily considering its under-levered balance sheet.

Despite its acquisition of Concho Resources Inc. that gave the company a prime drilling position in the Permian Basin, COP says it is restraining future capital spending and has pledged to reinvest just 70% of its cash flow while returning the rest to shareholders through dividends and the share buybacks.

#2. BP Plc.

At a time when many oil companies are blaming the Texas Freeze for hampering their production targets, UK’s leading oil and gas multinational BP Plc (NYSE:BP) has emerged as a winner from February’s frigid weather.

BP has posted robust Q1 2021 earnings, with first-quarter underlying replacement cost profit, used as a proxy for net profit, coming in at $2.6 billion, well above a profit of $115 million in the fourth quarter and $791 million for the first quarter of 202 as well as Wall Street’s expectations for a first-quarter profit of $1.4 billion.

Interestingly, BP revealed it profited big from the Texas Freeze, with management saying that its gas trading unit enjoyed an “exceptional” Q1, taking advantage of prices that skyrocketed 300-fold in some areas and helping to drive profit well above pre-pandemic levels.

“We were well-positioned for colder-than-normal weather in the U.S.” as well as in Asia, CEO Bernard Looney has told Bloomberg.

“We have a very, very strong and long history of knowing how to manage these disruptions and doing well. And of course we had disruptions in the first quarter in Asia and the United States,” CFO Murray Auchincloss has said.

So, what does BP plan to do with its new jackpot?

After reaching its net debt target of $35 billion a year earlier than expected, BP has now committed to $500 million in share buybacks in the second quarter.

BP has previously said that reaching its net debt target would trigger share buybacks and that it remains committed to returning at least 60% of surplus cash flow in 2021 to investors.

BP generated surplus cash flow of $1.7 billion in the quarter, meaning more buybacks could be coming.

Dividend Hikes:

#1. Marathon Oil Corp.

Marathon Oil Corp. (NYSE:MRO) is one of the leading E&P companies and the owner of the nation’s largest refining system, with approximately 2.9 million barrels per day of crude oil processing capacity across 13 refineries.

Marathon Oil has yet to report Q1 earnings but has reported some encouraging preliminary information on Q1 financial and operational estimates and also announced a good dividend hike.

Marathon Oil says Q1 production clocked in at 345K net boe/day with sales of 341K net boe/day. Q1 cash flow from operations totaled $610M-$630M, representing $10M-$20M of negative changes in working capital. Meanwhile, first-quarter unhedged realizations came in at an estimated at ~$55/bbl for oil; $24/bbl for natural gas liquids and $6.30/mcf for natural gas.

The best part: Marathon Oil has declared $0.04/share quarterly dividend payable June 10 and good for a 33.3% increase from the previous dividend of $0.03 per share. MRO stock now sports a forward dividend yield of 1.42%, suggesting there’s room for further hikes.

Marathon Oil’s close peer, Valero Energy Corp. (NYSE:VLO), sports a much higher yield of 5.30%. Valero has declared $0.98/share quarterly dividend, in line with the previous distribution and payable June 8.

Valero reported GAAP EPS of -$1.73, beating the consensus estimate by $0.12, while revenue of $20.8B (-5.9% Y/Y) beat by $1.23B.

#2. Equinor ASA

Norway’s national oil company, Equinor ASA (NYSE:EQNR), delivered an all-around impressive report and its best quarterly results since 2014.

Adjusted earnings clocked in at $5.47 billion in the first quarter, a 167% Y/Y improvement compared to the same period in 2020; Adjusted earnings after tax were $2.66 billion up from $560 million, while revenue of $16.13B (+7.0% Y/Y) beat by $340M.

According to company President and CEO, Anders Opedal, Equinor largely benefitted from recovering oil and gas prices, helping to improve net cash flow above $5 billion and reduce adjusted net debt ratio to below 25%.

The best part: Equinor increased its quarterly dividend by 25% to $01.5 per share to bring the forward yield to 2.86%.

#3. Royal Dutch Shell

Anglo-Dutch oil and gas supermajor Royal Dutch Shell Plc. (NYSE:RDS.A) returned disappointing results, missing on both top-and bottom-line expectations.

Q1 2021 earnings of $3.2 billion represented a 10.3% improvement over the same period a year earlier; however, GAAP EPS of $0.72 fell short of Wall Street’s expectations by  $01.9. Shell’s topline was equally disappointing, with revenue of $55.67B (-7.3% Y/Y) missing by $6.51B.

Nevertheless, Shell managed to raise its dividend by 4.2% to $0.347/ADS quarterly dividend, marking the second time in six months it has hiked the payout.

Shell also announced that it had managed to reduce net debt by more than $4 billion last quarter, progressing towards the $65 billion milestone to increase shareholder distributions.

#4. Chevron Corp.

At a time when the vast majority of oil and gas companies have been reporting blowout earnings, America’s second-largest E&P company, Chevron Corp. (NYSE:CVX), was a notable laggard, missing on both top-and bottom-line expectations despite managing to swing to a profit.

Chevron reported Q1 2021 Q1 GAAP earnings dropped to $1.38B, or $0.72/share, from $3.6B, or $1.93/share, in the year-ago period. GAAP EPS of $0.72 was 0.16 below the consensus while revenue of $31.07B (+4.6% Y/Y) missed by $1.48B.

A big offender was Chevron’s refining and chemical units, which reported a Q1 profit of just $5M vs. a $1.1B a year ago, which the company attributed to the February winter storm in Texas as well as the continuing impact of the pandemic.

Meanwhile, Q1 production of 3,121 was below the consensus of 3139 Mboe/d.

Still, Chevron declared $1.34/share quarterly dividend, good for a 3.9% increase from the prior dividend of $1.29. The shares now sport an impressive 5.20% forward yield.