The biggest U.S. oil and gas producers are limiting supply, defying calls from the Biden administration to increase production even as soaring fuel prices driven by Russia’s war in Ukraine generate windfall profits.
Major shale oil and gas producers, including ConocoPhillips, Pioneer Natural Resources and Devon Energy, all reported sharp increases in second-quarter profits this month as high crude and natural gas prices fill industry coffers.
But executives say they remain under pressure from Wall Street to return the windfall to investors through dividends and share buybacks rather than spending heavily to boost production.
“Unless we have shareholders who come and say, listen, we absolutely don’t like these big dividends. We don’t like your stock buyback program. We want you to go back to a growth model “Until we see that, I don’t see any reason to change our strategy.”
That sentiment has been echoed by other shale executives in the latest sign that oil companies and their shareholders remain unresponsive to politicians’ calls for more oil and gas supplies after the Russian invasion of the EU. Ukraine which has caused fuel prices to skyrocket. Energy prices have pushed inflation rates in the United States and Europe to levels not seen in 40 years.
President Joe Biden and other Western politicians have attacked oil companies’ decision to redirect profits to shareholders rather than invest in new production that would help rein in prices.
Over the past decade, the U.S. shale industry has become notorious for its freewheeling spending that has boosted production but inflicted heavy losses on shareholders and plunged companies into deep debt.
The current approach has slowed the growth of the country’s oil supply compared to recent years when commodity prices were high. The United States produces about 12.1 million barrels of crude per day, according to the Energy Information Administration. That’s an increase of around 800,000 bpd from a year ago, but still well below pre-coronavirus pandemic highs.
Production growth this year has been mainly driven by private operators who are not subject to the same type of shareholder pressure to limit investments.
Occidental Petroleum says it is still focused on paying off more of the debt it incurred to buy Anadarko Petroleum in 2019 and raising its dividend. For now, he considers investing money in his own stocks a better bet than increasing production.
“We don’t feel the need to ramp up production,” said company chief executive Vicki Hollub. “We think one of the best values right now is investing in our own stock.” Billionaire investor Warren Buffett’s Berkshire Hathaway has acquired a nearly 20% stake in Occidental, which has more than doubled its share price over the past year.
This year marked a reversal in the fortunes of the shale industry after heavy losses during the pandemic, although fears of a recession once again clouded its outlook.
The S&P oil and gas producers exchange-traded fund is down about 26% from its recent highs in early June, but remains up 25% this year, making it a benchmark in a year dark for the whole market.
Still, many oil executives say the supply disruption resulting from the Russian invasion of Ukraine will put a floor under crude prices even if economic growth slows.
“What’s a little different this time is that today’s world still seems to be chronically short of physical barrels with little spare capacity to fill that void,” said Travis Stice, CEO of Diamondback Energy. “The macroeconomic picture looks quite positive for energy prices over the next couple of years, even despite what I know is a recessionary impact.”