Pump jacks operating in Eddy County in New Mexico.
Paul Ratje / AFP via Getty Images
Big oil stocks will start reporting earnings in the coming days, and they are likely to post results that show a vast improvement from last year.
Much of the basic improvements, however, are already discounted in their stock prices, so investors will be looking for more than just impressive earnings. One of the biggest issues that analysts have been discussing is whether companies will start buying back their own stock.
Historically, buybacks are a mixed blessing. Companies have a bad track record of buying stock when the price is high, essentially wasting their capital. But buybacks can also help stocks because they reduce overall equity and create extra demand for a stock, which can push it higher. In future quarters, they can also lift earnings per share by reducing the overall share count.
Oil companies are in a unique spot right now. With oil prices over $70 a barrel, they are generating considerable amounts of cash. But investors have been adamant that they don’t want companies to drill more, because of their past record. In earlier boom cycles, companies have invested heavily in expanding drilling and then found themselves with high expenses and low returns when oil prices went south again.
So it’s not clear what oil companies should do with their excess cash now if they don’t intend to reinvest it. Some have already increased their dividends, but raising dividends can also be controversial: A high fixed dividend becomes a burden if oil prices fall again.
Credit Suisse analyst Manav Gupta wrote in a note published Tuesday that the buyback question will be one of the most crucial ones investors consider during earnings announcements. But Gupta doesn’t expect most big companies to initiate them. Exxon Mobil (ticker: XOM), for instance, has said its No. 1 goal for its excess cash is to pay down its debt. And the company already has one of the most expensive dividends in the industry, paying $15 billion a year back to shareholders.
Other analysts have speculated that Chevron (CVX) will buy back shares after pausing its buyback plan during the pandemic. But Gupta isn’t so sure.
“In our opinion, Chevron will wait for commodity prices to stabilize, and refining margins to at least start approaching mid-cycle levels before they make this decision,” Gupta wrote. “Chevron would only reinstate a buyback when they believe they can sustain it over longer-term. With the Delta variant spreading and OPEC looking to raise volumes, we don’t believe Chevron will reinstate buybacks on the second quarter earnings call.”
Chevron CEO Mike Wirth said at a conference last month that the company wanted to buy back shares only if it could commit to a long-term plan, saying “we would want to do it on a program that we could see through normal ups and downs in commodity cycles.”
Gupta also doesn’t expect Cenovus Energy (CVE) or Canadian Natural Resources (CNQ) to institute buybacks.
But he does expect two other companies that already have buyback programs — Canadian companies Suncor Energy (SU) and Imperial Oil (IMO)–to continue them. Gupta also expects Suncor to raise its dividend.
Write to Avi Salzman at [email protected]
