Drilling vs Returns. US oil producers compromise as windfall tax threatens

June 13 (Reuters) – U.S. oil producers taking advantage of sky-high prices are doling out billions to shareholders and building up cash reserves, a strategy that angers lawmakers and voters grappling with record fuel prices while winning over Wall Street.

Soaring fuel prices have pushed inflation to a 40-year high and are expected to push U.S. gasoline more than a dollar to $6 a gallon by August. This perspective leads some officials to argue that the industry’s focus on returns benefits the few at the expense of consumers.

The trade-off between increasing payments for a single quarter and increasing production spending has robbed the market of nearly half a million barrels of new oil a day, based on Reuters production estimates. potential if half of the payments from existing investors were for new oil and gas. drilling.

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Revenue 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 consultancy BTU Analytics, a FactSet company. Its estimate only covers 32 publicly traded oil and gas producers.

Leaders face calls in Washington for windfall levies, which could slash energy profits. A group of more than 30 lawmakers recently called for a congressional vote on a new oil tax.

On Friday, US President Joe Biden slammed oil companies, saying they were intentionally withholding more drilling to drive up oil and stock prices. [nL1N2XX1VP]

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

Executives and investors have argued that fuel prices are set by the market and retailers, not producers. Material and labor shortages have limited the rate at which they can ramp up production, and spending far more on new drilling would erode capital efficiency and drive investors out.

Although analysts and oil executives don’t expect a windfall tax to pass here, Britain recently imposed a 25% oil profits tax to offset utility bills. consumer energy, giving hope to some U.S. lawmakers proposing the tax. And resistance to the tax could diminish as fuel prices soar and corporate profits follow.

“If the Conservative government in the UK can support a windfall tax, we should be able to adopt” a US equivalent, said Representative Ro Khanna, a California Democrat and co-sponsor of the tax proposal.

The goal is to raise $45 billion a year, with revenue funding payments to consumers.

But a windfall tax would kill the incentive to drill more, oil executives said, and take away some of the revenue that funds new technological advances that led to America’s shale revolution that made the United States the world’s top producer. . It would also reduce the ability of oil companies to raise external financing.

“It’s a terrible idea,” said Mike Oestmann, managing director of shale producer Tall City Exploration. “If you want less of something, or a certain behavior, or a certain industry, tax it more heavily.”

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INCREASE PRODUCTION, NOT PRICES

Proponents of windfall taxation are driven by the idea that US energy companies are suspending production to keep prices and profits high. The companies returned some $9.51 billion to investors in the first quarter, according to energy consultancy Wood Mackenzie.

If oil producers had spent half of the $9.51 billion on new drilling, it would fund some 660 new shale wells, according to a Reuters analysis using energy technology firm Enverus’ average costs of 7.14 million dollars per shale well last year.

Production varies by basin, but on average, a new well can deliver some 672 bpd of oil, according to BTU Analytics. Based on the additional wells and new average shale oil production, production could be increased by approximately 450,000 bpd.

Those extra barrels could lift U.S. production this year past the pre-pandemic record of 12.23 million bpd in 2019. The government expects production to increase by 720,000 bpd to 11.92 million bpd in 2022.

MAKE ENERGY STOCKS ATTRACTIVE AGAIN

Between 2006 and 2019, the top 50 U.S. oil producers spent $170 billion more on capital expenditures (capex) than they raised on operations, using debt and equity to cover deficit, says independent oil analyst Paul Sankey.

“Effectively, there has been no return” for shareholders, he said.

Over the past decade, investors have shunned energy companies because of their lack of performance and have slumped their weighting in the S&P 500, a measure of shareholder interest, to less than 3% in 2020, versus more than 16% in 2008. Booming gains on high oil and gas prices.

The shift in sentiment came as producers shifted to a strategy of investing only a third of their cash flow in drilling and other capital expenditures, compared to most of their cash flow there. is two years old, according to the latest data from Enverus.

The focus on shareholder returns rather than new production does not disappear with rising energy prices. US crude prices are up about 60% so far this year.

“No mainstream (shale producer) increased investment in the first quarter for increased activity,” Kaes Van’t Hof, chief financial officer of shale company Diamondback Energy Inc (FANG.O), said in a statement. a recent post on Twitter.

This drive to keep production going and reward investors through dividends and buybacks is “changing the aura of investing”, making energy stocks attractive again, said Matthew Stephani, chairman of Cavanal Hill Investment Management, which makes part of BOK Financial Corp.

The S&P 500 (.SPNY) oil and gas sector is up more than 60% year-to-date, outperforming the average of the broad market index, which is down for the year.

Will investors accept a return to higher expenses and lower shareholder returns? They won’t, say portfolio managers and investors.

“As an investor, I think it’s a good balance. Companies have shown they can’t be trusted,” said Chris Duncan, who tracks shale companies for asset manager Brandes. Investment Partners.

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Reporting by Liz Hampton in Denver Editing by Marguerita Choy

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