Pioneer dividend proposal aims to attract fresh investment
The company’s new strategy to retain and draw shareholders aims to shake up the shale growth model
Appetite for US shale stocks has faded sharply in recent years. Overreliance on external funding, poor payouts, mounting debts and an obsession with production growth have all combined to trigger an investor exodus. Between October 2018 and February 2020, the S&P Exploration and Production Select Index collapsed by 56pc, despite WTI crude prices slipping by only 30pc over the same period.
The bruising economic downturn since March has only exacerbated the situation. Strained balance sheets have seen a swathe of Chapter 11 filings across the shale patch. And even the majors have felt the investor backlash. From early January until the height of domestic economic lockdowns, the share prices of both ExxonMobil and Chevron slumped by over 55pc while US independent ConocoPhillips dropped by 65pc.
But, with economic restrictions easing and market fundamentals looking more positive into 2021, some producers are turning to new strategies to entice investors. Permian-based independent Pioneer Natural Resources has pitched a variable dividend, first payable in 2022, on top of its regular dividend pay-out to attract new investors and ensure capital discipline.
“The production growth rate is something that we can do, and then provide all excess cash flow to deliver a base and a variable dividend” Sheffield, Pioneer
According to the company’s plan, if crude tops $45/bl into 2021 Pioneer will grow production by at least 5pc annually. On that basis, the firm would reinvest 70-80pc of free cash flow (FCF) back into the business, with the remaining payable to shareholders through base and variable dividends. The finalised plan will be released in early Q1 2021, with quarterly payouts set to start the following year. Anything above 5pc oil growth would see even bigger returns for investors
“The reason we are not just doing base is because too many companies have increased their base and then they get in trouble during a down cycle and have to cut their dividend, as we have seen happen throughout the S&P 500,” says Pioneer CEO Scott Sheffield. “The 5pc production growth rate is something that we can do, be very efficient at it, and then provide all excess cash flow, basically to deliver a base and a variable dividend.”
Previously, investors across the shale patch had complained about rampant production growth at the expense of FCF and worthwhile shareholder returns. Pioneer had targeted 20-25pc growth before the current economic downturn. But such expansion often came at a cost, and this year mounting debts have fast-tracked bankruptcies across the shale patch, with even high-profile producer Chesapeake Energy going under.
Instead, Pioneer’s new dividend model will focus on financial stability, controlled growth and—most importantly for investors—the promise of regular payouts. Rather than a one-off special dividend, the quarterly variable payouts offer much more motivation to invest in a US shale recovery.
$45/bl – Base for the variable dividend payout
And other companies are also considering the strategy. Beyond Pioneer, fellow indie Devon Energy and ConocoPhillips have said they could adopt a variable dividend policy in the future. “I think other E&P companies are likely to look at this strategy really closely and give it serious consideration,” says Leo Mariani, managing director at US equity research firm Keybanc Capital Markets.
Getting house in order
Another factor that should help attract investors to Pioneer’s long-term plan is the company’s strong balance sheet. The producer has been able to keep its net debt-to-Ebitda ratio below one, despite oil prices plunging and a loss of $150mn across the first half of the year.
Pioneer has also managed to dramatically slash costs. Horizontal lease operating costs have fallen by 27pc over the past 18 months and production costs by 26pc over the first half of the year. “When you look at these efficiency gains, we continue to drive down our well costs and drastically improve capital efficiency,” says Joey Hall, executive vice president, Permian operations, at Pioneer.
The combination of robust finances, sharp cost reductions and a resource base of over 10bn bl oe puts the firm in a strong position to outlast the downturn and turn its attention to a potential oil price rally into next year and beyond.