Free cash flow continues to soar for North American producers in Q3

Record levels of free cash flow continue to be generated by North America’s oil and gas producers according to a new report from Evaluate Energy that outlines how that cash is being used.

Free cash flow – the difference between operating cash flow and capex – reached a combined $19.1 billion in Q3 2021 for a study group of 84 U.S. and Canadian producers. The full report is available at this link.

“No quarter since the start of 2018 has seen a higher total operating cash flow than Q3’s $32.5 billion, while capital spending was flat from Q2 to Q3 for the study group,” said Mark Young, report author and Senior Oil & Gas Analyst at Evaluate Energy.

Four peer groups within the report are based on whether a producer has a U.S. or Canadian headquarters plus their respective oil weightings. Canada’s five oilsands majors are separated out into a fifth peer group.

“Companies treated capex priorities very differently in Q3 compared to Q2,” Young said. “Every group we examined cut capex as a percentage of operating cash flow compared to Q2.

“Ironically, in Q2 it was almost entirely the reverse – save for U.S. oil producers, every group saw capex increase as a percentage of operating cash flow compared to Q1. Debt repayments took centre stage in Q3 instead of capital spend.”

For the combined group of 84, capital spending being flat at $13.4 billion in Q3 meant capex came in at just 41% of operating cash flow.

The report also shows how far each group used extra cash flow on repaying debt and increasing shareholder returns via dividends and share repurchase plans.

Permian Basin sees US$30 billion of upstream M&A in just 6 months

Evaluate Energy’s latest M&A report shows that between the start of April and the end of September, the Permian Basin in the United States saw almost US$30 billion in new M&A deals announced for E&P assets.

“After a bumper quarter in Q2 that saw over US$18 billion in new deals agreed, Q3 saw just under US$12 billion of its own,” said Eoin Coyne, report author and Senior Analyst at Evaluate Energy.

The vast majority of this Q3 spend came from ConocoPhillips acquiring the Permian assets of Royal Dutch Shell for US$9.5 billion in cash.

“ConocoPhillips had already made a major move with the $13 billion acquisition of Concho Resources during Q4 2020,” said Coyne. “That was an all-stock deal, so ConocoPhillips retained enough liquidity to fund this latest transaction with available cash.”

The other ~US$2.5 billion in Permian deals this quarter included deals by Callon Petroleum, Lime Rock Resources and a royalty interest acquisition by Viper Energy Partners.

For more on these deals and other U.S., Canadian and global upstream M&A activity in Q3 2021, download Evaluate Energy’s latest M&A report at this link.

Top U.S. Upstream Deals in Q3 2021 (Permian deals in bold)

Eni, Shell lead oil producers in green energy deal making in 2021

Eni and Shell have been the most active among traditional oil and gas producers when it comes to green energy sector deal making in 2021, according to a new report from Evaluate Energy.

Over the past few years, intense and consistent investor pressure over carbon usage and climate goals has prompted many E&P companies to explore options in greener energy sectors and diversify their portfolios.

Evaluate Energy’s new report includes a rundown of every upstream deal in Q3 2021 and details on green energy investments by oil and gas producers. It is available for download at this link.

Eni’s busy third quarter is the reason for its position atop the rankings.

“Four of Eni’s six green energy deals were announced between July and September,” said Mark Young, report co-author and Senior Analyst at Evaluate Energy. “These latest investments will see the company acquire Italy’s second largest operator in the electric vehicle charging space, as well as increase its European wind and solar operational capacity by over 650MW.”

Shell joins Eni with six investments made up to September 30.

“Early activity from Shell this year was also mainly focused on European markets, but its two most recent investments have both been in the U.S.,” said Young. “These two U.S. deals included the acquisition of a renewable energy residential retailer and a sustainable fuels producer.”

Details on all of Q3’s major green energy investments by Eni, Shell and other upstream companies are available as part of Evaluate Energy’s latest M&A report.

Note for chart: “Other” includes deals in the following sectors, among others: Biomethane, Geothermal, Hydro, Retail power from renewable energy, Green energy-related technology.

Upstream M&A rises to $44 billion in Q3 2021

Evaluate Energy’s latest report shows that upstream M&A spending reached $44 billion around the world during Q3 based on deals announced between July and September.

This total is:

  • 23% higher than $36 billion in Q2; and
  • 25% higher than average quarterly spending over the past five years.

Spending was supported by strong prices for oil and gas.

“Oil demand increases reflected a resurgent global economy and a relative lack of supply from either the free market or OPEC+,” said Eoin Coyne, report author and Senior Oil & Gas Analyst at Evaluate Energy. “This led to an average WTI price in Q3 of $70.23, the highest quarterly average price since 2014. Natural gas saw an even more acute imbalance. Parts of Europe saw record natural gas prices and Henry Hub price averages in the U.S. hit $4.19, an increase of 47% on the average price in Q2.”

Despite the increase in deal value on previous quarters, the overall activity level was unchanged.

“What we refer to as ‘significant deal counts’ were identical in Q3 and Q2,” Coyne said. “Thirty-five deals were valued at greater than $50 million in both quarters. Larger corporate deals and higher valuations for asset deals due to increased oil and gas prices accounted for the overall higher deal value in Q3.”

Evaluate Energy’s M&A report for Q3 2021 includes analysis on the following:

  • Permian Basin deals involving Shell, ConocoPhillips, Callon Petroleum and more
  • Spartan Delta’s continued growth in Canada and a recent spike in royalty interest acquisitions involving Topaz Energy and PrairieSky
  • Multibillion-dollar deals affecting the natural gas industry in Australia and Brazil’s ultra-deepwater oilfields
  • Green energy sector deals involving Shell, BP, Eni and Galp

Oilsands majors accrue $7.8 billion in free cash flow in H1 2021

Canada’s oilsands majors continue to generate huge amounts of free cash flow in 2021.

Higher commodity prices in the first half of 2021, coupled with a slow return to pre-pandemic levels of capital spending, has resulted in operating cash flow significantly outweighing capital budgets for many producers across the U.S. and Canadian upstream sectors this year.

This is especially true in the Canadian oilsands, with Canadian Natural Resources, Cenovus Energy, Imperial Oil, MEG Energy and Suncor Energy recording a combined free cash flow of $7.8 billion in the first half of the year.

This analysis is part of a new Evaluate Energy report on key cash flow and capital management trends across the North American upstream sector. Access the report here.

While it is not unusual for oilsands producers to generate billions in free cash flow, these 2021 values remain highly significant. Only three financial quarters between the start of 2018 and the beginning of the pandemic in Q1 2020 saw values higher than the free cash flow recorded in either Q1 or Q2 2021.

Despite this recent high in free cash flow, the data also shows that capital spending has now recovered to pre-pandemic levels for the five producers.

These oilsands companies never deviated far from spending $2.5-$3.5 billion each quarter before the pandemic started in Q1 2020, and Q2 2021 was the first quarter of that magnitude since. This can actually be seen across the Canadian industry, with the other 37 Canadian producers in our report recording combined Q2 capex greater than averages seen prior to the pandemic.

Evaluate Energy’s Q2 2021 cash flow review for North American oil and gas producers is available now. The report includes analysis of dividend increases, capital budget levels and debt-related spending for 86 U.S. and Canadian oil and gas producers.

Dividends increase across North American upstream industry

North American producers are refocusing on increased shareholder returns with abundant free cash flow evident across the board in Q2 2021.

This is according to Evaluate Energy’s latest review of cash spending patterns for 86 North American oil and gas producers, which can be downloaded at this link and, this quarter, includes data on dividend payments and share buybacks.

“When combining dividend payments and net share repurchases, we can see over US$4 billion spent on shareholder returns by the study group for the first time since the pandemic started in late Q1 2020,” said Mark Young, report author and Senior Analyst at Evaluate Energy. “Things are moving slowly but latest data reveals a renewed, concerted effort by producers to return increased earnings to shareholders.”

A jump from just over US$2 billion in total shareholder returns in Q1 to around US$4 billion three months later may not appear all that gradual – this is because two oilsands producers skew the analysis.

“Imperial and Suncor are alone responsible for 80% of 2021’s total buybacks so far. The data may suggest a sudden jump in spending across the board, but these two companies are an anomaly when it comes to the whole group, at least up to the end of June.

“Where we really see more widespread increases in shareholder returns is in dividend per share data, even if the dollar values fail to jump off the page,” said Young.

As the pandemic took hold, the number of companies declaring a quarterly dividend fell sharply from 29 in Q1 2020 to just 20 in Q2 2020. As well as those nine companies that stopped paying dividends entirely, eight more reduced quarterly distributions as cash tightened.

Q1 and Q2 2021 witnessed a recovery – particularly among oil producers who comprised the bulk of North America’s dividend-paying producers before the pandemic.

  • By the end of June, 28 of the study group were paying dividends. Q1 and Q2 both saw 12 companies increase dividends per share from the previous quarter
  • Cash used for dividends since the start of Q3 2020 increased by an average of US$276 million per quarter for the whole group.

“This US$276 million increase may seem insignificant when billions are being spent on capital budgets and debt repayments, but individual investors will likely approve,” said Young.

Evaluate Energy’s Q2 2021 cash flow review for North American oil and gas producers is available for download now. The report also includes a look at remaining capital budget levels for 2021 and debt-related spending for all 86 companies.

Canada’s top oil and gas operators of 2021

The 2021 Top Operators Report from the Daily Oil Bulletin looks back at how Canada’s oil and gas leaders pivoted to meet the challenges of 2020, and how they are positioning their organizations for future success.

Download the report here.

Once again, the report taps into the experience of professional services firm KPMG in Canada to provide insight into what strategies operators could pursue to thrive in the current environment.

The report also features a broad swath of the insights and opinions from industry leaders gleaned from Daily Oil Bulletin coverage, along with commentary from data providers Evaluate Energy and CanOils.

The following articles available via JWN Energy contain some of the key takeaways from the report:

 

Share buybacks will be key theme in second half of 2021

More and more oil and gas producers are releasing plans for major share buybacks after a bumper six-month period for free cash flow.

Buybacks are welcomed by investors as they tend to boost share prices in the short-term and improve per share benchmarks as the number of outstanding shares in the market is reduced.

Our analysis of North American producers showed that debt repayments and tidying balance sheets were key points of focus in Q1 2021 as free cash flow began to increase significantly after a dire 2020. The same trends can be seen globally.

Now that cash flow has been consistently high for longer, rewarding shareholders through share repurchases appears to be the next step for many producers, judging by the recent outpouring of buyback announcements we’ve seen accompanying oil company Q2 results around the world. Dividend increases are also expected across the industry.

Below, we have summarized buyback plans recently announced by some of the world’s largest oil and gas companies:

BP

The British supermajor intends to execute a share buyback of $1.4 billion before releasing its Q3 results. Based on the company’s current forecasts and pricing assumptions, BP expects to deliver buybacks of around $1 billion per quarter and have capacity for an annual increase in the dividend per ordinary share of around 4% on average through 2025.

Chevron

Chevron will resume share repurchases in Q3 at an expected rate of $2-3 billion per year. Chevron has completed share repurchases in 13 of the last 17 years, returning over $50 billion in total to shareholders.

ConocoPhillips

The company lowered its capital and adjusted operating cost guidance for 2021 and announced plans to increase 2021 share repurchases by $1 billion, bringing the total planned return of capital to shareholders to roughly $6 billion for the year.

Eni

Alongside a €0.86 per share dividend in Q3, the Italian major is set to buy back €400 million in shares by the end of the year.

Royal Dutch Shell

Having reduced net debt by $12 billion since Q2 2020, focus now shifts to shareholder distribution for Shell. The company has rebased its dividend to $0.24 per share, an increase of 38% from Q1 2021, and plans to buy back up to $2 billion of its shares before year-end. This represents an expected full year 2021 shareholder distribution of around 20-30% of operating cash flow.

TotalEnergies SE

The French company’s board of directors has decided to allocate up to 40% of any additional cash flow generated above $60 per barrel to share buybacks. The value of these repurchases for 2021 has been widely reported to be at least $800 million.

Evaluate Energy helps investors and industry observers track energy company capital management trends and quarterly cash flow results. Click the links to find out more about Evaluate Energy and Evaluate Energy Documents. All $ references above are US dollars.

Download our full review of Q1 cash flow trends for 86 producers from Canada and the United States here.

Green energy M&A: BP, Repsol, Equinor among oil and gas players active in Q2 2021

Europe’s oil and gas majors again led the way in terms of green and renewable energy sector deal-making among oil producing peers in Q2, according to Evaluate Energy’s latest M&A report.

“With the energy transition in mind, traditional E&P companies are heavily engaged in deal-making for renewable projects to diversify portfolios,” said Mark Young, report co-author and Senior Oil and Gas Analyst at Evaluate Energy.

“Over the past few years, intense and consistent investor pressure over carbon usage and climate goals has prompted European producers into leading the way. The usual suspects showed up again in Q2, with BP, Equinor, Repsol and TotalEnergies all featuring in our report thanks to deals covering wind, solar and electric vehicle sectors.”

Evaluate Energy’s quarterly M&A report expanded in Q1 to include a review of green and renewable energy sector deals by companies historically associated with oil and gas production. The Q2 report is now available to download free here.

The report includes details of:

  • BP and Repsol deals for U.S. renewable sector projects
  • BP’s second electric vehicle-related deal in as many quarters
  • Three separate Equinor deals, including a solar power acquisition in Poland
  • TotalEnergies’ wind farm deal in Taiwan

The report also includes the usual rundown of this quarter’s major upstream oil and gas deals. A total of $35 billion was spent in Q2 in a series of multi-billion-dollar U.S. mergers.

Upstream oil and gas M&A rises to $35 billion in Q2 2021

A series of high value mergers in the U.S. Permian Basin led to a sharp increase in global upstream deal value in Q2, according to Evaluate Energy’s latest quarterly M&A report.

“Between April and June, we saw $35 billion in new E&P deals agreed,” said Eoin Coyne, report co-author and senior M&A analyst. “This is eight times higher than the same time last year at the height of the pandemic, and a significant uptick on last quarter where $19 billion in new deals were agreed.”

The full report is available for free download here.

Coyne pointed to flat deal counts to illustrate the impact of a series of high value U.S. mergers (particularly in the Permian).

“Despite the sharp rise in deal value in Q2, what we refer to as ‘significant deal counts’ were remarkably similar to Q1 2021,” he said. Relative to Q1, Q2 saw just two more deals valued at over $100 million (for a total of 30), and the same number of deals valued at over $50 million and $10 million (36 and 54, respectively).

“Meanwhile, we saw $18 billion in new deals agreed in the Permian including deals by Cabot Oil & Gas and Pioneer Natural Resources, and eight deals in total in the U.S. with a value greater than $1 billion.”

For deal analysis in the U.S. and a summary of Q2 green energy deals by oil and gas producers, plus an overview of upstream M&A activity in Canada from Tourmaline Oil, Tamarack Valley Energy and Whitecap Resources, download the full Evaluate Energy report here.