The energy sector's buyback activity is has been dictated primarily by energy prices, though oil price volatility has coincided loosely with general economic growth trends since 2006. When cash flow is strong and liquidity is high, companies often choose to return cash to shareholders through dividends and share repurchases. Cash dividend volatility is usually low, so share repurchase activity tends to fluctuate more with business results. Tumbling energy prices led to drastic reductions in buybacks through 2015, and the modest outlook for price rebounds in the coming years suggests that repurchase volumes will remain below recent historical highs.
Timeline of Buybacks
2008 had the most buyback activity over the decade that ended in 2015, followed closely by 2007. Energy sector repurchase outlays reached $60.2 billion in 2007 and $60.7 billion in 2008. 2006 was a relatively distant third at $50.2 billion. Repurchase activity was muted in 2009 and 2010 as a global recession and financial sector turmoil clouded economic outlook. Crude oil prices tumbled as a global recession loomed, when West Texas Intermediate (WTI) fell from $134 per barrel in June 2008 to $39 per barrel in February 2009. This negatively impacted cash flow for oil companies and brought uncertainty to income forecasts across the sector.
Buyback activity in the energy sector rose in 2011 as economies around the world recovered and oil prices rebounded. 2011 marked a high for share repurchase outflows for any full year since the recession, with $44.6 billion returned to shareholders. Repurchase growth moderated and ranged from $35.5 billion to $43.5 billion from 2012 to 2014, as the charge in energy prices stagnated before oil reached pre-recession lows.
The first quarter of 2014 represented the most active quarter for buybacks at any point in the decade preceding 2016, with $13 billion of stock bought back. The sharp decline in WTI oil price per barrel from $105 in June 2014 to $37 in December 2015 led to a corresponding drop in buybacks, driven by the same fundamental factors as the 2009 decline. The number of shares repurchased fell sequentially in each quarter throughout 2015, settling at a decade-low $2.77 billion in the fourth quarter of the year.
Buybacks by Company
The level of cash outlays for share repurchases is dictated primarily by the size of the company. Consider two companies spending the same amount on buybacks proportionate to the size of their balance sheets. The one with more assets will obviously spend more. This means that the largest companies, generally major integrated oil and gas firms, will be the most significant drivers of buyback volume.
Exxon Mobil Corporation (NYSE: XOM) is the largest energy company in the Standard & Poor's (S&P) 500 Index, with a May 2016 market cap of $365 billion. Over the 10-year period from 2006 to 2015, Exxon Mobil spent $206 billion on share repurchases, leading the sector. The timing of these buybacks matched closely that of the sector in general, with steep drops in 2009 and 2015 and the highest values in 2007 and 2008. Chevron Corporation (NYSE: CVX) followed Exxon Mobil, with a much lower $40.8 billion spent over the course of the decade. ConocoPhillips Company (NYSE: COP) was just below Chevron at $36.4 billion. ConocoPhillips and Exxon Mobil were proportionately similar, but Chevron lagged both in repurchases relative to market capitalization.
Schlumberger Limited (NYSE: SLB) is one of the largest companies in the sector, with a May 2016 market cap of $105 billion. The equipment and services firm spent $19.5 billion on repurchases over the decade that ended in 2015, proportionately low relative to the diversified energy exploration and production firms detailed above. Valero Energy Corporation (NYSE: VLO), which operates downstream services, was another large contributor, spending $14.4 billion on buybacks during the decade despite its $27 billion May 2016 market cap.
The U.S. Energy Information Administration (EIA) forecasts average WTI price per barrel of $34.60 in 2016 and $40.58 in 2017. Consensus long-term forecasts do not call for prices to approach the high levels seen in 2007 or 2013. These factors indicate that investors should expect continued buyback volumes below historical highs in the energy sector, and the large oil and gas companies will likely be the most significant buyers.