Shareholders of U.S. oil refiners should expect companies to direct less cash to investors through share repurchase programs as the oil market continues to emerge from the throes of a pandemic.
Oil demand bottomed in April as the seven largest U.S. refiners saw second-quarter revenue plunge $62.03 billion, or 59.4%, year-over-year to $42.41 billion. Oil refiners have responded by all but eliminating share repurchases, and executives suggested during second-quarter earnings calls that it could be a while before they resume those programs.
In 2019, the group repurchased $5.44 billion in shares and paid $5.21 billion in dividends. At $2.66 billion, dividends paid through the first half of 2020 are roughly on pace with those of a year ago. But through June 30, companies have repurchased just $596.2 million in shares, mostly in the first quarter. Companies tend to repurchases their own shares when they have excess cash available and when executives believe the market is undervaluing company shares.
Valero Energy Corporation said it has $1.4 billion that its board previously authorized for share repurchases after buying back $147.0 million worth of its shares in the first quarter. But executives outlined other priorities for cash in light of the pandemic.
"The key to remember here is we're in kind of a funky, what we consider to be a short-term period," Valero CEO Joe Gorder said July 30. "We don't know what next week is going to hold or what the next month is going to hold or the next year. … We're not willing right now to make decisions with long-term implications based on what we consider to be a short-term set of circumstances."
Gorder reiterated priorities for the company's use of cash would be, in order: high-return capital projects, reducing debt, building cash reserves and share repurchases.
Phillips 66 repurchased $443 million of common stock in the first quarter but did not buy back any shares during the second quarter.
"Our view is midyear next year, we'd probably get back to something approaching midcycle for our company," Phillips 66 CEO Greg Garland said July 31. "As we do that, then we can kind of get back to a normalized framework as we think about the 60-40 allocation."
Under that framework, the company strives to direct 60% of free cash flow to growing and sustaining the business while reserving the remaining 40% for return to shareholders. But the refining and chemicals company issued $3 billion in debt to weather the pandemic. "There's going to be some priority to debt repayment over the next two to three years," Garland said. "Our view is that investable opportunities in midstream in 2021 and 2022 are probably going to be less than what we would have anticipated. That's going to free up more capital to put towards debt repayment and shareholder distribution[s]."
Marathon Petroleum Corp., which expects $16.5 billion in after-tax cash proceeds from the pending sale of its Speedway retail gasoline business, would not commit to an amount that it would return to shareholders. Marathon bought back $1.95 billion worth of company shares in 2019 but has not made any share repurchases in 2020.
As for dividends, PBF Energy Inc. has suspended its dividend as it manages its balance sheet through the pandemic, while CVR Energy Inc. elected not to pay a second-quarter dividend, preserving cash for a potential acquisition.
"We are probably more flexible with our dividend than other companies have been in the past, and that's just the nature of our shareholders and our structure," CVR Energy CEO David Lamp said Aug. 4. Activist investor Carl Icahn controls most of the company. "I think it depends on what other higher return opportunities there are out there for the cash and that’s about as simple as the decision goes," Lamp said.