A Frantic Western Share Buyback: A Controversial Share Price Boom

Many major western oil companies are set to undergo record-breaking share buybacks to take advantage of the soaring oil and gas prices that are currently present. This is to boost return on investment for shareholders after a period of underperformance as a result of the COVID-19 pandemic.

Oil prices have recently surpassed the $100 a barrel mark, the highest price since 2018, and gas prices are currently at a record high. Share buybacks and subsequently a return to shareholders has already surpassed 38 billion USD this year and is set to only get higher as companies release statements regarding their share buyback targets. Shell is leading the pack in 2022, aiming to buy back over 12 billion USD of its shares and at least 8.5 billion USD of those buybacks will be completed in the first half of the year. Chevron is also set to drastically increase its share buybacks. Chevron brought back shares worth 1.4 billion USD in 2021 and has stated that it will spend 3 billion USD to 5 billion USD on share buybacks this year. In addition to Shell and Chevron, BP has stated that it will repurchase another 1.5 billion USD of shares using surplus 2021 cash flow before it announces first-quarter results this year. Oil companies’ cash flows are extremely high now as the future lower demand on oil and gas has meant that oil and gas companies are investing less in replacing fossil fuel stocks.

One major event that has recently driven up the price of oil and gas, is the recent attack of Russia on Ukraine. This is because western oil companies, who rely upon around a quarter of their oil supply and more than a third of their gas supply from Russia, are fearing a disruption to supply during the conflict. As a result of the conflict, Brent crude oil has risen by more than 9% to over 105 USD per barrel and Europe’s wholesale gas price has risen by more than 60%. US officials have recently joined the EU and UK in freezing the assets of Putin and his foreign minister in an attempt to either make Putin stop his invasion of Ukraine or make Russia pay financially for the invasion. However, there are fears that Russia may use natural gas as a weapon to disrupt the European economy. This is because gas markets are far more localised whereas disrupting oil supplies would cause a much broader fallout. Europe relies on Russia for around 40% of their gas imports and Moscow could inflict immediate pressure on the continent by shutting off the gas taps, with limited overflow into global markets. Analysts from Rystad Energy have said that the risk of Russia reducing the supply of gas to Europe is very high since Germany stopped the approval of the Nordstream 2 pipeline.

Although western oil companies have witnessed extremely large spikes in shares prices, some companies, such as BP, are now seeing more internal problems emerging from the conflict between Russia and Ukraine. BP has recently seen increased pressure from MPs to divest from their 20% holding in Rosneft. This is because Rosneft is being used directly by Russia to fuel Russian troops’ bloody invasion of Ukraine. However, BP has been criticised for its stake in Rosneft ever since Russia annexed Crimea in 2014 but BP kept its holdings in the controversial company and reported profits of more than 2.4 billion USD from its Rosneft stake last year. It can therefore be said that, although BP will be heavily scrutinized for its stake in Rosneft, there is no indication that the company will sell its stake. There will also be a very limited number of potential buyers for BP’s 20% Rosneft stake due to the bad reputation that Rosneft has.

Western Oil companies have stated that they will undertake large buybacks to boost returns to investors after a long dry period during the COVID-19 pandemic. This is occurring at a time when oil and gas share prices are the highest on record due to multiple factors. However, the recent invasion of Ukraine by Russia has played a pivotal role in the recent surge in gas and oil prices because of the unpredictability of Russia’s supply of oil and gas to Europe.

By: Joel Muir

Sector Head: Eric Hardy