Midland Reporter-Telegram: Study: Dividends, stock buybacks found to pull away oil cash

Houston Chronicle
Midland Reporter-Telegram
12/02/2007

The “Big Five” oil companies are putting more money into stock buybacks and dividends than new exploration and development despite a fourfold increase in cash flow since the 1990s, according to a study by Rice University’s Baker Institute for Public Policy.

Exxon Mobil Corp., Royal Dutch Shell, BP, Chevron Corp. and ConocoPhillips collectively spent 56 percent of their cash flow on share repurchases and dividends in the last year, moves that are good for investors in the short term, according to Amy Myers Jaffe, a co-author of the study.

But those moves put the companies’ long-term oil reserves at risk and have led to lower reserve replacement rates.

“It’s as if they are slowly liquidating their long-term asset base,” Jaffe said. “They may see a declining rate of production over time, and eventually that is bad news for both their shareholders and consumers.”

The companies have also put greater emphasis on developing existing fields in the last few years, Jaffe notes, likely in an effort to take advantage of current high oil prices.

Nationalization moves

This is in contrast to oil companies owned by foreign governments that have aggressively expanded exploration efforts throughout the world.

In many instances, these national oil companies have taken advantage of their political connections to supplant the Big Five from projects. In some cases projects are simply nationalized out from under the companies.

One example is in Venezuela, where earlier this year Exxon Mobil and ConocoPhillips were forced to relinquish control over projects there to the national oil company, Petroleos de Venezuela, or PDVSA.

Both companies refused to sign deals with PDVSA, with ConocoPhillips writing off $4.5 billion worth of projects.

In Russia, BP and Shell had to cede control to Russian gas monopoly OAO Gazprom in a number of Siberian projects.

Firms cite budgets

In response to questions about the study, several companies stressed the sizes of their exploration budgets.

Don Campbell, a Chevron spokesman, said his company continues to spend aggressively to find new energy sources.

“Our 2007 capital and exploratory budget is $20 billion, up approximately 20 percent from 2006 and more than 40 percent from 2005,” Campbell said, compared with a share repurchasing program of $5 billion. “We project our production to grow by an average of 3 percent per year from 2006 to 2010.”

A spokesman for Shell said the company will invest more in capital projects this year than any other energy company in the world — up to $23 billion, ” … to develop a broad energy portfolio.”

“This will include investments in second generation biofuels, wind energy and unconventional fuels, such as coal gasification, oil shale and tar sands,” spokesman Shaun Wiggins said.

$6 billion a year for BP

BP officials declined comment on the study, but CEO Tony Hayward said in a speech in Houston that in the past five years BP has invested $30 billion in the U.S. alone and is investing an average of $6 billion a year over the next decade.

Other conclusions in the study:

* Exploration spending by the Big Five has been flat or lower since the Organization of the Petroleum Exporting Countries began to constrain market supply in 1998, but the next 20 largest U.S. oil firms have increased their spending such that it now equals that of the Big Five.

* This trend appears to be easing, however, with exploration spending by the Big Five rising by 50 percent from 2005 to 2006.

* Oil production of the Big Five has declined from 10.25 million barrels a day in 1996 to 9.45 million in 2005, with a rebound to 9.7 million in 2006.

* The next 20 biggest U.S. independent oil firms have seen their oil production rise since 1996, from 1.55 million barrels a day to about 2.13 million in 2006.

Still important

The five oil majors are still an important force, with more than 20 percent of all non-OPEC production coming from those firms. And they’re considered to be better managed than most of the national oil companies, making better use of technology and capital, the study notes.

But investors are betting the national companies will be the long-term winners, Jaffe said.

“Investors are placing a higher premium for the stock shares of emerging national oil companies, despite the measurable edge the majors have in terms of operational efficiency,” she said.

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