Energy Firms Pay Record Prices to Buy Own Shares as Oil Booms

(Bloomberg) — Energy stocks are on a roll as soaring oil prices push them to record highs. So what are the companies doing with the windfalls? Buying back their shares.

Most Read from Bloomberg

At least 21 large U.S. and Canadian energy companies have bought back their own stock in the last quarter, with the move continuing this year in the buildup to Russia’s invasion of Ukraine: Halliburton Co. signaled late in January it could use excess free cash flow to buyback shares and more recently, Occidental Petroleum Corp. launched a $3 billion buyback program.

To Wall Street strategists schooled in the logic of “buy low, sell high” this makes little sense particularly at a time when oil revenues are surging and the stocks hit yearly, multi-year or — in some cases — all-time highs. Even some companies are scratching their heads.

“People buy back their stock, historically, at the top in our industry,” Pioneer Natural Resources Co. CEO Scott Sheffield said at the CERAWeek by S&P Global conference in Houston. “Not one U.S. company bought their stock in 2020, which is when we should have been buying our stock.”

Laura Lau, senior vice-president and chief investment officer at Toronto-based investment manager Brompton Group believes that raising dividends would be a more efficient way to get capital to shareholders.

“Personally, I like money in my hands,” Lau said in an interview.

Read more: Build Liquidity, Raise Payout Are Best for E&Ps, But No Buybacks

The S&P 500 energy index touched the highest level since May 2015 this week, up 105% since the start of 2021, as Russia’s war in Ukraine pushed Brent and West Texas Intermediate crude to around $120 a barrel. The windfall has helped 24 of the 53 members of the S&P 500 Energy Index and S&P/TSX Composite Energy Index double recent quarterly year-over-year revenues, Bloomberg data shows.

Oil fell 10% on Wednesday, but more than half the members of the S&P 500 Energy Index and S&P/TSX Composite Energy Index are still trading near 52-week highs.

Occidental, which also hit a 52-week high on Monday, raised eyebrows when it announced on Feb. 24 a $3 billion buyback program in light of the mound of debt it took on for its $55 billion takeover of Anadarko Petroleum Corp. in 2019. The Texas-focused oil producer’s net debt was $27.7 billion at the end of the fourth quarter.

Occidental representatives pointed to chief financial officer Rob Peterson comments last month saying the company intends to pay down another $5 billion in debt before initiating share repurchases. He added the goal is to “reward shareholders with the triple benefit of a sustainable common benefit, an active share repurchase program, and a continuously strengthening financial position.”

Not Attractive

“Though we support returning cash to stakeholders via dividends, the $3 billion share-buyback program does nothing for the company’s financial health,” Bloomberg Intelligence analyst Vincent Piazza wrote on Occidental’s buyback.

Similarly, Goldman Sachs recently recommended investors buy dividend-paying companies as a hedge against inflation. And Desjardins Securities analyst Justin Bouchard wrote in a recent note that “there is a price at which buybacks cease to be attractive.”

For companies including Canadian Natural Resources Ltd., messages such as Bouchard’s have yet to resonate.

The company spent $1.26 billion on buying back its own stock in the fourth quarter, even as it breached a previous all-time high. For this year, the Canada’s largest oil and gas company plans to spend 50% of its free cash flow buying back up to 10% of its shares, which are up nearly 40% since January.

“The longer sky-high commodity prices persist, the sooner CNQ will have to reevaluate its current capital allocation framework,” Bouchard wrote.

CNQ representatives didn’t reply to a request for comment.