America’s largest oil and gas producers are keeping a lid on supply, defying calls from the Biden administration to lift output even as soaring fuel prices driven by Russia’s war in Ukraine deliver bumper profits.
Top shale oil and gas producers including ConocoPhillips, Pioneer Natural Resources and Devon Energy all unveiled a sharp increase in second-quarter profits this month as high crude and natural gas prices fill the industry’s coffers.
But executives say they remain under pressure from Wall Street to return the windfall to investors through dividends and share buybacks rather than spending heavily to increase production.
“Unless we have shareholders that come in and say, look, we absolutely — we do not like these big dividends. We do not like your share repurchase programme. We want you to go back to a growth model,” Rick Muncrief, chief executive of Devon Energy, one of the shale patch’s biggest producers, told analysts. “Until we see that, I see no reason to change our strategy.”
That sentiment was echoed by other shale executives in the latest sign that oil companies and their shareholders remain unmoved by politicians’ calls for more oil and gas supply after Russia’s invasion of Ukraine sent fuel prices soaring. Energy prices have driven inflation rates across the US and Europe to levels not seen in 40 years.
President Joe Biden and other western politicians have attacked the oil companies’ decision to funnel profits back to shareholders rather than invest in new production that would help tame prices.
Over the past decade, the US shale industry became notorious for freewheeling spending that delivered rising output but inflicted heavy losses on shareholders and plunged companies deep into debt.
The approach now being adopted has slowed the country’s oil supply growth compared to recent years when commodity prices were elevated. The US is producing about 12.1mn barrels a day of crude, according to the Energy Information Administration. That is up about 800,000b/d from a year ago, but still well shy of pre-coronavirus pandemic highs.
The growth in output this year has primarily been driven by private operators not under the same kind of shareholder pressure to cap investment.
Occidental Petroleum says it is still focused on paying down more of the debt it took on to buy Anadarko Petroleum in 2019 and lifting its dividend. For now, it sees ploughing money into its own shares as a better bet than expanding output.
“We don’t feel the need to grow production,” said the company’s chief executive Vicki Hollub. “We feel like one of the best values right now is investment in our own stock.” Billionaire investor Warren Buffett’s Berkshire Hathaway has built an almost 20 per cent stake in Occidental, helping its share price more than double over the past year.
This year has marked a reversal in the shale industry’s fortunes after hefty losses during the pandemic, although fears of a recession have once again cast a cloud over its prospects.
The S&P oil and gas producers exchange traded fund is down about 26 per cent from its recent highs in early June, but remains up 25 per cent this year, making it a standout in a bleak year for the broader market.
Yet many oil executives claim that the disruption in supply stemming from Russia’s invasion in Ukraine will put a floor under crude prices even as economic growth slows.
“What’s a little bit different this time is that the world today still appears to be chronically short physical barrels with not a lot of spare capacity to fill that gap,” said Travis Stice, chief executive of Diamondback Energy. “The macro situation looks pretty positive for energy prices over the next couple of years, even in spite of what I know will be a recessionary impact.”