After several challenging years, the oil industry is getting back up on its feet again this year. Nowhere is that more evident than in how oil companies are allocating capital. Not only are they spending enough money to grow production at a healthy clip, but they also have plenty left over to send a gusher of cash back to investors this year through buybacks and dividends.
Binging on buybacks
Oil stock buybacks started in earnest last year. U.S. oil giant ConocoPhillips (COP -0.04%) was among the first to announce plans to begin sending more cash to investors when it unveiled its three-year strategy at the end of 2016. The company had initially hoped to sell enough assets to repurchase $3 billion in stock by 2019. However, the company blew past its asset sale goal, enabling it to buy back that entire amount last year. Meanwhile, it planned to repurchase an additional $1.5 billion in shares this year, but with oil prices improving, ConocoPhillips added another $500 million to this year's authorization.
Oil companies are opening up the taps on cash returns to investors. Image source: Getty Images.
A similar thing happened to Anadarko Petroleum (APC). Last year, the oil giant announced that it would use some of its cash pile to repurchase $2.5 billion in stock through the end of this year. However, with crude well above the $50 a barrel Anadarko needs to run its business, the company also added $500 million to its repurchase program for 2018, boosting its total authorization to $3 billion.
Meanwhile, several other drillers have announced repurchase plans for 2018:
| Oil Stock | Market Cap | Buyback |
|---|---|---|
| Pioneer Natural Resources (PXD 1.18%) | $29 billion | $100 million |
| Noble Energy (NBL) | $14.5 billion | $750 million |
| Hess (HES 1.22%) | $14.3 billion | $500 million |
| Encana (OVV 0.39%) | $10.2 billion | $400 million |
| QEP Resources (QEP) | $2.3 billion | $1.25 billion |
Data sources: Pioneer Natural Resources, Noble Energy, Encana, Hess, QEP Resources, and YCharts.
Of that group, the name that sticks out is QEP Resources, which plans on selling several assets to give it the cash to repay debt and finance the development of the Permian Basin assets it plans on retaining, and it also plans to buy back a big chunk of its stock.
Image source: Getty Images.
A gusher of dividend increases, too
In addition to planning to repurchase stock this year, several oil companies also announced meaningful dividend increases. ConocoPhillips, for example, boosted its payout 7.5%, which was an acceleration from last year's 6% increase and pushed its yield above 2%. While ConocoPhillips' payout remains more than 60% below its peak from 2016, it's heading in the right direction. Meanwhile, EOG Resources (EOG 0.55%) gave its investors a 10.4% increase for this year, which was the first time it raised the payout since oil prices started crashing in late 2014.
Anadarko and Pioneer Natural Resources, on the other hand, provided their investors with much more meaningful increases this year. In Pioneer's case, it's boosting its annual payout fourfold. It comes off a meager base and only increases the yield from 0.05% to 0.2%, but it is the company's first dividend increase in a decade. Anadarko is also providing investors with a jaw-dropping increase, boosting its dividend fivefold from last year's rate. That nearly brings the payout back to where it was in 2016, before Anadarko slashed it 82% to preserve cash, and it now sits just 7% below that peak. As a result, Anadarko yields a more meaningful 1.7%, which is up significantly from the paltry 0.34% yield it had before the increase.
Meanwhile, fast-growing Permian Basin-focused driller Diamondback Energy (FANG 0.92%) initiated its first quarterly dividend this year. In starting a dividend, Diamondback said it was taking its "first step toward rewarding shareholders for their support of our growth these last five years," according to CEO Travis Stice.
More oil stocks could boost their dividends this year as part of their strategy to return money to investors. That's due to a general view within the industry that reinvesting 100% of annual cash flow into drilling more wells doesn't make sense in a market that's still working to drain off the excess from years of pumping out more oil than the market needed.
Already paying dividends
The initial stock-buyback programs at Anadarko Petroleum and ConocoPhillips have already started paying off for investors, considering that both stocks are up more than 20% over the past six months while shares of their average peer are up only about 6% over that timeframe. As more oil companies buy back their shares, it could enable their stocks to outperform stingier rivals. That's why investors should pay close attention to the oil stocks announcing meaningful cash returns to shareholders this year, since that could be what gives them the fuel to outperform the competition.
