Top US Energy Companies Refocus on Investor Returns over Investments in New Oil Fields
In a significant shift, top energy companies in the United States have prioritized shareholder returns over investments in new oil and gas fields for the first time. This information comes from a report released by Ernst & Young LLP, which highlights the evolving strategy of the US energy industry.
Despite the positive outlook for energy prices, the report reveals that US energy companies have not changed their focus on investor returns. In recent years, these companies have been striving to regain investor favor after overspending on production growth adversely affected returns, leading to a decline in their market valuation.
The consequences of this renewed focus are clear, as the energy sector now accounts for about 4.5% of the S&P 500’s market valuation. While this marks a doubling of its weighting since 2020, it remains below its historical average of 8%.
According to the research conducted by EY, the top 50 US independent oil and gas producers allocated a total of $58.8 billion to dividends and share buybacks last year, surpassing the $55.1 billion invested in exploration and development. This shift demonstrates an increase in returns to investors, with last year’s payouts more than seven times higher than the levels seen in 2020.
Despite the decline in investments in new oil and gas fields, spending on finding and tapping these resources did increase, although at a slower pace. Bruce On, a principal in EY’s strategy and transactions group, predicts that this trend will continue even in a high-interest rate or high oil price environment. He suggests that one outlet for this surplus cash could be acquisitions, which have seen a rise in activity this year and are expected to continue.
The improved returns for investors can be attributed to several factors. Strong oil and gas pricing played a significant role, coupled with a newfound cost-consciousness that emerged after the collapse of energy prices three years ago. Profit per barrel reached $32 last year compared to approximately $10 in 2014, indicating a positive shift in profitability for the sector.
Even with the current uptick, the market weight of the energy sector within the S&P 500 remains below its historical average. However, the industry’s recent doubling in valuation demonstrates positive growth and a renewed focus on delivering value to shareholders.
As the energy landscape continues to evolve, it is evident that major US energy companies are reevaluating their strategies to prioritize returns for investors. By shifting their focus away from investments in new oil and gas fields, the industry aims to restore confidence and profitability. With the outlook for energy prices remaining favorable, these companies are set to maintain their commitment to providing returns to shareholders, even in changing market conditions.
