We are now in the midst of the summer vacation season, but a recent survey showed that only two in five Americans are planning a trip that requires a flight and/or hotel stay; the fact is that inflation has cut into discretionary income. . US E&P companies are in a similar boat. After a brutal decade marked by intense commodity price volatility, oil and gas producers have over the past two years wooed investors with a new fiscally conservative approach that prioritizes collecting free cash flow to finance increasing shareholder returns. But more recently, lower commodity prices and persistent inflation have significantly eroded funds available for dividends and share buybacks. In today’s RBN blog, we look at the increasingly difficult cash allocation decisions that oil and gas producers made in the first quarter of 2023 and are likely to face in the quarters ahead.
First, a couple of definitions. Discretionary income is what is left after paying our taxes and fixed costs like housing, food and clothing. We can use the rest to save or invest, treat ourselves to luxuries, donate to charities, indulge in recreation, etc. The equivalent for E&P is cash flow from operating activities (CFOA), which is the net income the company generates adjusted for non-Cash expenses such as depreciation and stock-based compensation, and for changes in the working capital. The largest allocation of this cash is to invest in replenishing oil and gas reserves and growing production through capital expenditures. What’s left is free cash flow, the funds available to finance acquisitions, pay down debt, and return capital to shareholders through dividends and share buybacks.
Just last summer make it rain, we reported that the 41 U.S. oil and gas producers we monitor were pouring money into shareholders as cash flows rose with rising commodity prices, with some E&Ps offering payouts of two digits As we described in Spread it around, dividends and share buybacks hit record levels in 2022. However, commodity prices fell in late 2022 and early 2023, and cash flows from operations declined by 21 % in 4Q 2022 and another 9% in 1Q 2023 to $32.5 billion. Free cash flow declined at a steeper pace, falling 32% in 4Q 2022 and 29% in 1Q 2023 due to a combination of increased capital expenditures and lower oil prices and the gas
