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Shale starts giving (a little bit) back

Producers are funneling more cash into share buybacks and dividends after months of pressure from shareholders to boost returns

Oil at $60 is making life a lot easier for US shale executives. For months, a debate has swirled around the industry pitting capital discipline, really the ability to deliver better returns to shareholders, against production growth. The uptick in the oil price has allowed executives to offer both to shareholders in the latest round of earnings calls this week.

Shale producers have rolled out a raft of new shareholder-friendly measures this week, including billions of dollars in new or accelerated buyback programmes and dividends, while also keeping their foot to the floor on production growth.

Diamondback Energy, a premier Permian producer, rolled out a $0.50 per share dividend after announcing stronger than expected operational results and plans to lift output by roughly 40% this year. The company has long said it would start paying a dividend when it was running more rigs, and generating more cash, but it moved the dividend up in response to rising investor demands.

Pioneer Natural Resources, another top Permian driller, surprised with a dividend hike and a new share buyback programme. It is lifting its dividend from $0.04/share to $0.16/share and plans a $100m share buyback. Pioneer is also selling its assets outside the Permian, including a sizable position in the Eagle Ford, to funnel cash into its more profitable West Texas acreage, another shareholder-friendly move.

Anadarko lifted its share buyback from $1.5bn to $2bn, and increased its dividend from $0.05/ share to $0.25/share and said it plans to pay down $1bn in debt this year. Encana got in on the party as well, announcing a $400m share buyback and plans to generate around $500m of free cash flow next year, which could eventually fund a larger buyback scheme. Laredo Petroleum, another Permian-focused driller, is using cash from a recent asset sale to fund a $200m share buyback.

What's behind the moves? The dollar amounts involved in these buybacks and dividends are relatively small and the yields on offer are nowhere near those offered by, for instance, the majors.

However, they are an important signal to markets that shareholders are a higher priority for cash. Buybacks and dividends are a break with the shale industries pre-crash business model, which saw them pump every dollar earned, and quite a few more raised in debt and equity issuances, into drilling new wells. That shift almost certainly wouldn't have happened without shareholders agitating for it in recent months.

There is also some positioning likely going on. The buybacks and dividends are, as analysts at the investment bank Jefferies put it in the case of Diamondback, a "show of strength" in the market—that they can deliver returns and growth. Many expect a wave of consolidation is coming for the tight oil sector sooner rather than later, in which case it is better to be seen as a shark than potential prey.

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