2 weeks Ago By OilPrice.com
No this is not about politics. A while ago, we argued that, facing weak demand and no shortage of supply, oil companies should not put their resources into producing more oil. The industry has an abominably bad record of investing in a way that does not benefit its owners, so why not just give the money back to them in the form of dividends instead of throwing it into holes in the ground? We didn’t get a lot of fan letters for that piece.
Plus, right after we aired our opinion, both ExxonMobil and Chevron made huge acquisitions of oil and gas properties. The heavyweights have spoken. What do these guys know? if(window.
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push({ placementName: "oilprice_medrec_atf", slotId: "oilprice_medrec_atf" });';document.write(write_html);} A few days ago, Donald Trump made a campaign appearance in Pennsylvania and enunciated his energy policy as frack, frack, frack, drill, baby drill, or words to that effect. We understand the attraction of that policy to people who make their living drilling for oil and gas.
But a Trump administration will have difficulty making people drive more, or convincing Brazil and Guyana not to dump more oil into the market (they want their share) or convincing our Saudi friends to step back, considering that their oil sales are falling below what they need to finance their development projects. Putting more oil and gas on the market will just depress prices, we would guess. But that is the background.
Our argument is that over more than a decade oil companies have consistently invested in a manner that does not earn the cost of capital and the market has noticed. It works this way: An oil company invests $100 in a well whose risk characteristics demand a 10% return. The well earns only 8%.
The market, which requires a 10% return, decides the well is worth only $80. Now think of an oil company as one big oil well. A company raises $100 to put into the ground.
Investors want to earn 10% ($10) but soon realize that the company will earn only $8 (8%), so they drop the price they pay for the company to $80 in order to earn that 10% return.) The oil and gas industry’s investment record is so bad as to beggar the imagination. Over the ten years ended October 24, 2024; To simplify, we argue that investor return comes in two parts, earnings paid out in dividends and growth that comes about by reinvesting the earnings that have not been paid as dividends.
Oil company reinvestment appears to have reduced shareholder value, not enhanced it. If you take the view that oil companies are in business to enhance the value of their shares by exploiting a natural resource as opposed to simply exploiting a natural resource, then something is wrong with this picture. If we were shareholders, we would advise managements not to drill and frack with abandon, because, if past is prologue, they will just destroy more value.
Other than that, vote for whomever you please. if(window.innerWidth ADVERTISEMENTfreestar.
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write(write_html);} By Leonard Hyman and William Tilles for Oilprice.com More Top Reads From Oilprice.com.
