After the Gold Rush: E&Ps take on debt to maintain shareholder returns as cash flow falls

What a difference a year makes! The summer of 2022 was a golden age for US E&Ps who embraced a dramatic shift in their business model from prioritizing growth to focusing on maximizing cash flows and emphasizing profitability of the shareholders. Oil prices above $90/bbl and gas prices around $7/MMBtu filled their coffers and funded lavish increases in share buybacks and dividends. But those golden days quickly faded as oil prices retreated and gas prices fell 66% above $2/MMBtu. In today’s RBN blog, we explain how E&Ps are struggling to maintain shareholder return programs in the face of shrinking cash flow.

On our blog Two shots from Happy We summed up an almost idyllic second quarter of 2022, as cash flows from the 41 US E&P companies we track rose 22% from the previous quarter to $43.4 billion with prices averages of $108/bbl for oil and $7.47/MMBtu for gas. Cash flow from operating activities (CFOA) topped $46.5 billion in Q3 2022 as share repurchases more than doubled to $9.7 billion from $4 billion in Q1 quarter 2022 and dividends rose 62% to $8.7 billion. But as shown in Figure 1, the average realized price (orange line) peaked in the second quarter of 2022 and fell to $34.57 per barrel of oil equivalent (boe) in the second quarter of 2023, 46% lower than a year earlier. Cash flows (blue bars) followed suit, hitting a two-year low of $26.2 billion.

Figure 1. Cash flow and realized prices, 1Q 2022-2Q 2023. Source: Oil & Gas Financial Analytics, LLC

Lower commodity prices add to the impact of inflation on the cost of oilfield goods and services. Producers largely held the capex line in 2022, budgeting maintenance-level spending to increase modestly from $14.4 billion in the second quarter of 2022 to $15.8 billion in the fourth quarter of 2022. No however, higher costs and the need to replace inventories of wells drilled but not completed (DUC) have pushed investment to $18.5 billion in the first quarter of 2023 and $20 billion in the second quarter of 2023.