This year, oil companies are swimming in cash thanks to higher oil and gas prices. They could allocate this windfall in many ways, including drilling more wells, making acquisitions, retiring debt, paying dividends, and repurchasing shares. Most companies are putting a greater emphasis on one option over the other.

For example, many oil companies have prioritized paying dividends this year. They're boosting their regular dividend and making additional variable or special dividend payments. However, Marathon Oil (MRO 0.80%) has bucked this trend by emphasizing share repurchases. It's having a pretty dramatic impact on its outstanding shares.

Going on a share-buying binge

Marathon Oil started buying back its stock last October. It did that after paying off another $900 million of debt in the third quarter, bringing its 2021 total to $1.4 billion and achieving its leverage target. That freed up its cash flow, allowing the company to spend $200 million on share repurchases that month. 

Marathon has gone on to repurchase a boatload of its stock, fueled by its surging free cash flow. It spent $3.4 billion on share repurchases by the end of this year's third quarter. These repurchases are having a jaw-dropping impact on its share count:

Graph of stock buybacks at Marathon Oil compared to peers.

Data source: Marathon Oil Investor Relations Presentation.

As that chart shows, Marathon Oil has reduced its outstanding shares by a peer-leading 20% over the past year. That's having a meaningful impact. For example, it recently enabled the oil company to boost its dividend payment by 13% per share. Marathon isn't paying out more cash to increase its dividend. Instead, it's funding the entire raise through the year-to-date reduction in its share count.

Marathon plans to buy back even more stock. The oil company recently added another $2.5 billion to its buyback authorization. That's enough to retire an additional 12.7% of its outstanding shares, given its current $19.7 billion market cap. Those incremental repurchases could allow it to continue growing its dividend per share without increasing its total cash outlay. 

Meaningful repurchases

Marathon isn't the only oil company with an impactful share repurchase program. While Devon Energy (DVN 0.40%) has become known for prioritizing dividend payments -- it launched the industry's first fixed-plus-variable dividend framework last year -- it has repurchased a decent amount of its shares. Devon's variable dividend framework sees it pay up to 50% of its post-base-dividend free cash flow via a variable payment. It has used a portion of the cash it retains to repurchase shares. Devon has already repurchased $1.3 billion of stock, reducing its outstanding shares by 4%.

That's having a meaningful impact on its growth. While Devon expects its oil and gas production to rise by 6% in the fourth quarter, it will grow by 9% per share thanks to its repurchases.

ConocoPhillips (COP 0.54%) launched a three-tiered capital return strategy this year. It pays a growing dividend, repurchases shares, and makes variable return of cash (VROC) payments. ConocoPhillips recently boosted its quarterly dividend payment by 11%. In addition, the oil giant increased its existing share repurchase authorization by an eye-popping $20 billion to $45 billion. The company has repurchased $20.7 billion in stock since launching the program in late 2016. 

That $20 billion addition to the repurchase authorization is enough to retire 12% of the company's outstanding stock. It could enable the company to increase the dividend without boosting its total cash outlay. 

APA Corporation (APA 0.67%) has also started returning a meaningful amount of cash to its shareholders in the last year. It set a target to return at least 60% of its free cash flow to shareholders via dividends and repurchases. APA recently doubled its dividend. It has also spent $1.8 billion on share repurchases. That has retired 15% of its outstanding shares since last June, putting it second only to Marathon in its peer group for share reduction in the past year.

Don't overlook the impact of share repurchases

Dividends have been all the rage in the oil patch this year. However, since the beaten-down sector trades at a bottom-of-the-barrel valuation compared to other industries, oil companies have been able to repurchase meaningful amounts of shares with their oil-fueled cash flows. That's enabling them to deliver faster production and dividend growth per share. Investors should look closely at oil companies with meaningful repurchase programs because they could create more shareholder value in the coming years.