Drill versus profit. Trade-offs of US oil producers as tariffs threaten According to Reuters

© Reuters. FILE PHOTO: Pump jacks work at dusk in Midland, Texas, U.S., February 11, 2019. Photo taken February 11, 2019. REUTERS/Nick Oxford

By Liz Hampton

(Reuters) – U.S. oil producers profiting from sky-high prices are spending billions of dollars on shareholders and building cash reserves, a strategy that has left lawmakers and voters struggling with record fuel prices while winning over Wall Street.

Rising fuel prices have pushed inflation to a 40-year record and are expected to boost US gasoline by more than a dollar to $6 a gallon in August. That outlook has some officials who say the industry’s focus on profits is benefiting a small number of consumers.

The balance between increased payouts in a single quarter and more spending on production has led to the market consuming almost half a million barrels of new oil a day, based on Reuters estimates of potential output if a half of the current investor’s payout goes to newly drilled oil and gas.

Earnings from major U.S. shale, which accounts for two-thirds of U.S. oil production, could hit $90 billion this year, up from $37 billion in 2021, according to consulting firm BTU Analytics, a FactSet firm. . Its estimate includes only 32 publicly traded oil and gas producers.

Executives are facing calls in Washington for wind taxes, which could cut energy profits. A group of more than 30 lawmakers recently urged Congress to vote on a new oil tax rate.

US President Joe Biden on Friday criticized oil companies, saying they are deliberately stopping drilling more to pump oil and raise prices. [nL1N2XX1VP]

“They’re buying back their own stock, which should be taxed,” Biden said.

Executives and investors have argued that fuel prices are set by the market and retailers, not manufacturers. Raw material and labor shortages have limited their output growth, and more spending on new drilling will erode capital efficiency and drive investors out.

While oil analysts and executives don’t expect the levy to pass here, the UK recently imposed a 25% oil profit tax to offset consumer energy bills, offers hope to some US lawmakers who proposed the tariffs. And resistance to taxes can decrease as fuel prices rise and corporate earnings follow.

“If the Conservative government in the UK can support low income taxes, we will be able to pass” the equivalent of the US tax rate, said Representative Ro Khanna, Democrat of California, and co-sponsor. tax proposal support said.

The goal is to raise $45 billion per year with proceeds funding consumer payments.

However, oil executives say the tariffs will kill more mining engines and take away some of the income that funds the new technological advances that led to the country’s shale revolution. United States, making the United States the world’s leading producer. It will also reduce the ability of oil companies to raise capital from outside.

“This is a terrible idea,” said Mike Oestmann, chief executive officer of shale producer Tall City Exploration. “If you want less of something, or some behavior, or some industry, tax it harder.”


The driving force behind the wind tax advocates is the idea that American energy companies are shutting down production to maintain prices and high incomes. The companies returned about $9.51 billion to investors in the first quarter, according to energy consulting firm Wood Mackenzie.

If oil producers spent half of the $9.51 billion on new drilling, they would finance about 660 new shale wells, according to a Reuters analysis, using the cost of new drilling, according to a Reuters analysis. Energy technology firm Enverus averaged $7.14 million per shale well last year.

Production varies per basin, but on average, a new well can provide about 672 bpd of oil, according to BTU Analytics. Based on additional wells and average new shale oil production, production could be increased to around 450,000 bpd.

Those extra barrels could lift U.S. production this year beyond the pre-pandemic record of 12.23 million bpd in 2019. The government forecasts output will rise 720,000 bpd to 11.92 million bpd by 2022.


Between 2006 and 2019, the top 50 US oil producers spent $170 billion more on capital expenditures (investment) than they earned from operations, using debt and equity. to cover the deficit, independent oil analyst Paul Sankey estimates.

“Effective, not profitable” for shareholders, he said.

Investors over the last decade have shunned energy companies for lack of profitability and reduced their share of a measure of shareholder interest, to less than 3% in 2020, from more than 16%. in 2008. S&P energy stock is 5.1% today with earnings growing. on high oil and gas prices.

According to the latest data from Enverus, the shift in sentiment comes as producers switch to a strategy of investing only a third of their cash flow in drilling and other capital expenditures, compared with the majority of cash flow. theirs two years ago, according to the latest data from Everus.

The focus on shareholder returns through new production will not disappear as energy prices rise. Prices are up about 60% so far this year.

“Not a single major player (shale producer) increased capex in Q1 due to increased activity,” said Kaes Van’t Hof, chief financial officer of shale firm Diamondback (NASDAQ: Energy Inc.) get a raise.

Matthew Stephani, president of Cavanal Hill Investment Management, part of BOK Financial Corp, said the willingness to keep production lines and reward investors through dividends and buybacks “is changing the investment halo”. make energy stocks attractive again, said Matthew Stephani, president of Cavanal Hill Investment Management, of BOK Financial Corp.

The S&P 500 oil and gas sector is up more than 60% year-to-date, well above the broad-market index average, which has fallen for the year.

Will investors accept a return on investment with higher spending and lower shareholder returns? They won’t, say portfolio managers and investors.

“As an investor, I think this is a good balance,” said Chris Duncan, who tracks shale firms for asset manager Brandes Investment Partners. Companies have shown they cannot be trusted.

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