Shale Drillers Are Beating Big Oil Where It Matters Most

Shale drillers have an all-or-nothing reputation, with many pursuing growth at any cost. It's an approach that cost investors dearly during the recent oil market downturn, when many drilling stocks sharply sold off as profits plunged along with the price of oil. Their strategy was in stark contrast to the returns-focused one of big oil giants ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), which preferred to balance growth with returning cash to investors by repurchasing shares and paying dividends.

However, those big oil buybacks have now dried up, and they're falling behind their nimbler rivals, which seemed to learn the lesson that growing at all costs doesn't pay. The resulting strategy shift has several drillers planning to return a boatload of cash to investors this year at a time when Exxon and Chevron can't afford to repurchase any more shares. They're thus beating their big oil rivals where it matters most by using buybacks to boost their share prices.

Disappointment upon disappointment

Exxon and Chevron have let investors down this year, reporting lackluster fourth-quarter results and failing to authorize any additional share repurchases. Because of that, the stock prices of both oil giants have dropped sharply since the start of the year, with Exxon plunging more than 16% while Chevron has fallen nearly 13%.

Worse yet, the companies didn't offer any easy fixes to get moving in the right direction. Exxon CEO Darren Woods warned that "capex is the price you pay for cash flow," after outlining a plan to increase capital spending from $23 billion last year up to an average of $30 billion by 2023 in an aim to boost production and double earnings and cash flow by 2025. That spending ramp comes at the cost of buying back shares in the near-term. Chevron, likewise, isn't generating enough excess cash right now to support a buyback since it plans on investing $18 billion this year, and $18 billion to $20 billion each year through 2020 in an aim to increase future cash flow. However, as that plan generates surplus cash, Chevron expects "to be in a position to resume our share repurchase program," according to CEO Michael Wirth.

The long-awaited handout

Meanwhile, as Chevron and Exxon ask investors to be patient with them, shale-focused rivals are tripping over each other to return cash to investors these days. The following table represents a sampling of the recently authorized buybacks by smaller oil companies:

What's more, the buybacks have had a notable impact on the stock prices of many of these drillers since their announcement. ConocoPhillips, for example, initially unveiled a $3 billion buyback in late 2016 as part of its efforts to streamline its portfolio by selling non-core assets. However, the company sold more assets than expected, which enabled it to repurchase that entire amount last year. Because of that, it has since increased its authorization to $7.5 billion, including plans to buy back another $2 billion this year. That program has created meaningful value for investors by driving the stock up nearly 22% since the day it first authorized the buyback. For comparison's sake, Chevron's stock is only up 8% over that timeframe while Exxon's is down nearly 15%.

Anadarko, meanwhile, started buying back shares last fall, initially authorizing a $2.5 billion program that at the time could have reduced its share count by 10%. Anadarko would go on to boost that program by another $500 million, which has acted like rocket fuel by driving shares up more than 31% since it announced the initial plan, vastly outperforming Chevron's flat stock and Exxon's nearly 8% decline over that same period.

Finally, Hess has also authorized an increasing buyback, announcing a $500 million program late last year that it has since increased by another $1 billion in 2018. Again, the decision has paid off considering that Hess' stock has gone up double digits since announcing the initial authorization, enabling it to outperform its big oil rivals by a wide margin. Meanwhile, most of the other oil stocks listed on the table only recently authorized a buyback, though many have still managed to outperform that big oil duo over the limited timeframe.

This outperformance could continue

Chevron and Exxon don't seem to be in any hurry to restart their buyback programs. Because of that, their stocks could continue sinking as investors begin favoring their faster growing and more shareholder-friendly shale-focused rivals, which seemed to have found the secret ingredient to create value for investors.

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Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.