In an unprecedented shift in financial strategy, leading U.S. energy corporations spent a more significant portion of their earnings rewarding shareholders in 2022 than in investments for new oil and gas explorations, as revealed in a recent report by Ernst & Young LLP (EY).
This trend highlights the evolving priorities of the U.S. energy sector, emphasizing enhanced returns for investors. Historically, many of these energy firms faced criticism for overspending on production expansion, which subsequently resulted in subpar returns. This negative perception prompted these companies to recalibrate their focus toward bolstering shareholder value.
The outcome? The energy sector now constitutes approximately 4.5% of the S&P 500’s market valuation. While this is an impressive double from its 2020 weight, it still trails its historical 8% average.
A deep dive into the financials showcases this new trajectory. The 50 leading U.S. independent oil and gas producers disbursed an astounding $58.8 billion in dividends and share buybacks last year. This eclipsed their exploration and development expenditure, which stood at $55.1 billion. Prominent names in this list, including DiamondBack Energy, Pioneer Natural Resources, and ConocoPhillips, reported a collective profit exceeding $333 billion in the same timeframe. This is a robust growth of 33% from the $217 billion recorded in 2014, a period when U.S. oil prices averaged around $93 per barrel.
Remarkably, payouts to investors in 2022 surged by 214% from 2021 and saw a more than seven-fold increase from the 2020 figures. Although investments in oil and gas explorations also grew, their pace was considerably more muted.
Bruce On, a distinguished member of EY’s strategy and transactions team, projected this trend to persist, irrespective of high-interest rates or oil price fluctuations. He also signaled a potential direction for the surplus funds: mergers and acquisitions. Such strategic movements have gained traction this year and are poised to further intensify in the forthcoming months.
The underlying impetus for these impressive returns can be attributed to the robust oil and gas prices combined with a heightened sense of cost efficiency. This newfound fiscal prudence emerged following the energy price crash three years prior. EY highlighted that the profit per barrel reached $32 last year, a stark contrast to the $10 in 2014 – even though the energy prices remained consistent.
Despite these shifts, the energy sector’s market weight within the S&P 500 remains below its traditional 8% benchmark.