At least 21 large U.S. and Canadian energy companies have bought back their own stock in the last quarter
Author of the article:
Bloomberg News
Geoffrey Morgan
A gas tanker truck driver refills the Petro-Canada gas tanks in Prince Edward County. Photo by ALEX FILIPE/SunMedia Energy stocks are on a roll as soaring oil prices push them to record highs. So what are the companies doing with the windfalls? Buying back their shares.
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At least 21 large U.S. and Canadian energy companies have bought back their own stock in the last quarter, with the move continuing this year in the buildup to Russia’s invasion of Ukraine: Halliburton Co. signalled late in January it could use excess free cash flow to buyback shares and more recently, Occidental Petroleum Corp. launched a US$3 billion buyback program.
To Wall Street strategists schooled in the logic of “buy low, sell high” this makes little sense particularly at a time when oil revenues are surging and the stocks hit yearly, multi-year or — in some cases — all-time highs. Even some companies are scratching their heads.
“People buy back their stock, historically, at the top in our industry,” Pioneer Natural Resources Co. CEO Scott Sheffield said at the CERAWeek by S&P Global conference in Houston. “Not one U.S. company bought their stock in 2020, which is when we should have been buying our stock.”
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Laura Lau, senior vice-president and chief investment officer at Toronto-based investment manager Brompton Group believes that raising dividends would be a more efficient way to get capital to shareholders.
Personally, I like money in my hands
Laura Lau
“Personally, I like money in my hands,” Lau said in an interview.
The S&P 500 energy index touched the highest level since May 2015 this week, up 105 per cent since the start of 2021, as Russia’s war in Ukraine pushed Brent and West Texas Intermediate crude to around US$120 a barrel. The windfall has helped 24 of the 53 members of the S&P 500 Energy Index and S&P/TSX Composite Energy Index double recent quarterly year-over-year revenues, Bloomberg data shows.
Oil fell 10 per cent on Wednesday, but more than half the members of the S&P 500 Energy Index and S&P/TSX Composite Energy Index are still trading near 52-week highs.
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Occidental, which also hit a 52-week high on Monday, raised eyebrows when it announced on Feb. 24 a US$3 billion buyback program in light of the mound of debt it took on for its US$55 billion takeover of Anadarko Petroleum Corp. in 2019. The Texas-focused oil producer’s net debt was US$27.7 billion at the end of the fourth quarter.
Occidental representatives pointed to chief financial officer Rob Peterson comments last month saying the company intends to pay down another US$5 billion in debt before initiating share repurchases. He added the goal is to “reward shareholders with the triple benefit of a sustainable common benefit, an active share repurchase program, and a continuously strengthening financial position.”
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Not attractive “Though we support returning cash to stakeholders via dividends, the US$3 billion share-buyback program does nothing for the company’s financial health,” Bloomberg Intelligence analyst Vincent Piazza wrote on Occidental’s buyback.
Similarly, Goldman Sachs recently recommended investors buy dividend-paying companies as a hedge against inflation. And Desjardins Securities analyst Justin Bouchard wrote in a recent note that “there is a price at which buybacks cease to be attractive.”
For companies including Canadian Natural Resources Ltd., messages such as Bouchard’s have yet to resonate.
David Rosenberg: Defensives over cyclicals as the knife falls on earnings estimates A few things investors should keep in mind in times of crisis Smart Money Watch: ‘Brutal’ selling in speculative tech stocks knocks Tiger Cub hedge funds The company spent US$1.26 billion on buying back its own stock in the fourth quarter, even as it breached a previous all-time high. For this year, the Canada’s largest oil and gas company plans to spend 50 per cent of its free cash flow buying back up to 10 per cent of its shares, which are up nearly 40 per cent since January.
“The longer sky-high commodity prices persist, the sooner CNQ will have to reevaluate its current capital allocation framework,” Bouchard wrote.
CNQ representatives didn’t reply to a request for comment.
Bloomberg.com
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