Cash Management

Energy Companies Returning Windfall

Shareholders are seeing buybacks and dividends, says an industry analyst, not because the companies are backing off investment, but because ''there...
Stephen TaubFebruary 8, 2006

UBS forecasts that shareholders of the world’s five largest energy groups could receive as much as $250 billion through share buybacks and dividends over the next three years, according to the Financial Times.

The FT pointed out that ExxonMobil, ChevronTexaco, BP, Royal Dutch/Shell, and Total returned an estimated $76 billion to their shareholders last year — while investing a little more than $50 billion on exploring and producing oil and natural gas.

“The size of the buybacks and the relatively low percentage that is being reinvested in the industry would tend to indicate that oil companies don’t have enough new upstream opportunities and projects to spend their money on,” Neil McMahon, analyst at Sanford Bernstein, told the newspaper. “The years 2005-2006 could well prove to be the peak of the industry in terms of profitability because they are having to spend their money on shareholders instead of reinvesting in oil projects that will yield production and revenue in the future.”

According to the FT, between 1980 and 1982 — the last time oil prices surged as they have recently — the industry spent more than 80 per cent of its free cash flow (after dividends) on finding and producing new oil. Today that figure is just 40 percent, the paper observes.

“It is not that they are holding back in investment, there is just not enough good stuff to invest in until foreign investment is allowed in areas of the Middle East currently closed and the business climate in Russia improves,” McMahon reportedly noted. “Perhaps the only place left to discover the type of giant fields the world has relied on in the past 30 years is in Russia and the Arctic,” David Bamford, a former head of BP’s global exploration program, told the FT.

For its part BP returned $19 billion to shareholders in dividends and buybacks in 2005, according to The Scotsman, and earlier this week the company raised its dividend 17 percent.

The company also announced that during the next three years, it will return as much as $65 billion to shareholders, based on an oil price of $60 per barrel. Even if the price fell to $41 per barrel (the average from 2003 through 2005), BP would still give investors $50 billion, the FT noted.

“If you look at the $65 billion figure and the market capitalization of about $200 billion, they’re saying you could technically get back almost a third of the company by 2008,” Colin Morton, an oil analyst at Rensburg Fund Managers, told the Scotsman.

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