High oil and natural gas prices have increased the cash flows of most U.S. shale producers, leaving many of these companies with hefty amounts of cash on the books and choices to make.
Most exploration and production companies, or E&Ps, have already reduced their debt and are paying back shareholders, but with no tolerance among investors for more capital spending, the cash has accumulated in company coffers, according to S&P Global Market Intelligence data and analysts.
"Nobody wants to step up activity," Truist Securities Inc. oil and gas analyst Neal Dingmann said in a phone interview Sept. 1. "So, you're not reinvesting or piling much money back into the ground and growing faster. Obviously, you're going to have a lot more coming back."
Dingmann expected cash balances to continue to increase, even as some money changes hands in a mild uptick in M&A activity as companies buy and sell adjacent leaseholds and businesses.
Cash reserves vs. oil and gas reserves
The growing amounts of cash on the books give E&Ps lots of choices, Gabriele Sorbara, oil and gas equity analyst with Siebert Williams Shank & Co., said in an email. "Ultimately, the money will have to go toward acquisitions and exploration to replenish reserves," Sorbara said. "We have seen a lot of M&A, but as inventory levels are depleted in the coming years, the urgency for M&A will increase."
Some of these deals have already happened. Analysts pointed to several deals in which drillers bought adjacent operators in the Permian Basin and the Haynesville and Marcellus shales.
"One interesting note from the Q2'22 results is the substantial increase in cash balances, especially for the oil-weighted producers," Nick Cacchione, founder of Oil & Gas Financial Analytics LLC, said in a report for RBN Energy LLC. "That gives them plenty of dry powder for accretive bolt-on acquisitions in key plays, such as Devon Energy Corp.'s $1.8 billion purchase of Eagle Ford producer Validus Energy Services LLC" in an all-cash deal announced in August.
Balance sheets, buybacks
Exxon Mobil Corp. ended the second quarter with almost $19 billion in cash on hand, more than five times the amount it had in the second quarter of 2021. The supermajor, which felt an uncomfortable pinch in 2020 when oil prices collapsed due to the COVID-19 pandemic, planned to build a multibillion-dollar cash position while paying a dividend and buying back shares.
"We expect to build our cash balance to between $20 billion [and] $30 billion, which gives us both a strong balance sheet and a strong cash balance, which we view as a competitive advantage that provides us flexibility through the cycle," Senior Vice President and CFO Kathryn Mikells told analysts on Exxon's July 29 second-quarter earnings conference call.
Chevron Corp. Vice President and CFO Pierre Breber said the major would spend some of its cash buying back shares and paying down more debt, with an emphasis on share buybacks. "We intend to maintain buybacks at this annual rate for a number of years across the commodity cycle," Breber said on Chevron's second-quarter earnings call. "We'll continue buybacks even when the commodity cycle turns down, and we'll lever back up our balance sheet closer to that 20% to 25% guidance range."
Breber said Chevron is committed to buying back $15 billion worth of company stock.
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