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Drilling vs returns. U.S. oil producers’ tradeoff as windfall tax threatens

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© Reuters. FILE PHOTO: Pump jacks operate at sunset in Midland, Texas, U.S., February 11, 2019. Picture taken February 11, 2019. REUTERS/Nick Oxford

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By Liz Hampton

(Reuters) – U.S. oil producers profiting from sky-high prices are doling out billions to shareholders and building cash reserves, a strategy irking lawmakers and voters struggling with record fuel prices while winning over Wall Street.

Soaring fuel prices have boosted inflation to a 40-year record and are expected to drive up U.S. gasoline by more than a dollar to $6 a gallon by August. That prospect has some officials arguing the industry’s focus on returns is benefiting a few at the expense of consumers.

The tradeoff between rising payouts for just a single quarter and more spending on production has deprived the market of nearly half a million barrels of new oil daily, based on Reuters’ estimates of potential output if half of existing investor payouts flowed to new oil and gas drilling.

Earnings from major U.S. shale, which accounts for two-thirds of U.S. oil output, could hit $90 billion this year, up from $37 billion in 2021, according to consultancy BTU Analytics, a FactSet Company. Its estimate covers only 32 publicly traded oil and gas producers.

Executives are facing calls in Washington for windfall levies, which could cut into energy profits. A group of more than 30 lawmakers recently urged a Congressional vote on a new oil tax.

U.S. President Joe Biden on Friday slammed oil companies, saying they are intentionally holding off drilling more to pump up oil and share prices. [nL1N2XX1VP]

“They’re buying back their own stock, which should be taxed, quite frankly,” Biden said.

Executives and investors have argued that fuel prices are set by the market and retailers, not producers. Materials and labor shortages have limited how fast they can ramp up output, and to spend a lot more on new drilling would erode capital efficiency and lead investors to exit.

Though analysts and oil executives do not expect a windfall tax to pass here, Britain recently imposed a 25% oil profit tax to offset consumer energy bills, giving hope to some U.S. lawmakers proposing the tax. And resistance to the tax may shrink as fuel prices soar and corporate earnings follow.

“If the conservative government in the U.K. can support a windfall tax, we should be able to pass” a U.S. equivalent, said Representative Ro Khanna, Democrat of California, and a co-sponsor of the tax proposal.

The goal is to raise $45 billion a year with proceeds funding payments to consumers.

But a windfall tax would kill the incentive to drill more, said oil executives, and take away some of the earnings that fund new technology advances that led to the U.S. shale revolution which turned the United States into the world’s top producer. It would also lessen oil firms’ ability to raise outside financing.

“This is a terrible idea,” said Mike Oestmann, chief executive of shale producer Tall City Exploration. “If you want less of something, or some behavior, or some industry, tax it more heavily.”

PUMPING UP OUTPUT, NOT PRICES

Motivating windfall tax advocates is the idea that U.S. energy companies are holding off production to maintain high prices and earnings. Companies returned some $9.51 billion to investors in the first quarter, according to energy consultancy Wood Mackenzie.

If oil producers had spent half of the $9.51 billion on new drilling, it would fund some 660 new shale wells, according to Reuters analysis using energy tech firm Enverus’ average costs of $7.14 million per shale well last year.

Output varies per basin but on average, a new well can deliver some 672 bpd of oil, according to BTU Analytics. Based on the additional wells and the average new shale-oil output, production could be boosted some 450,000 bpd.

Those extra barrels could lift U.S. production this year beyond the pre-pandemic record of 12.23 million bpd in 2019. The government projects output to rise 720,000 bpd to 11.92 million bpd in 2022.

MAKING ENERGY STOCKS ATTRACTIVE AGAIN

Between 2006 and 2019, the top 50 U.S. oil producers spent $170 billion more in capital expenditures (capex) than they collected from operations, using debt and equity to cover the deficit, estimates independent oil analyst Paul Sankey.

“Effectively, there were no returns” for shareholders, he said.

Investors last decade shunned energy companies for their lack of returns and knocked their weighting in the S&P 500, a measure of shareholder interest, to less than 3% in 2020, from more than 16% in 2008. S&P energy stocks today are 5.1% with burgeoning earnings on high oil and gas prices.

The change in sentiment came as producers shifted to a strategy of investing just a third of their cash flow into drilling and other capital expenses, compared with most of their cash flow two years ago, according to the latest data from Enverus.

Focusing on shareholder returns over new production is not going away with the rise in energy prices. U.S. crude prices are up about 60% so far this year.

“Not one large public (shale producer) increased capex in Q1 for increased activity,” said Kaes Van’t Hof, finance chief at shale firm Diamondback (NASDAQ:FANG) Energy Inc, in a recent twitter post.

That willingness to hold the line on production and reward investors via dividends and buybacks “is changing the investment aura,” making energy stocks attractive again, said Matthew Stephani, president of Cavanal Hill Investment Management, part of BOK Financial Corp.

The S&P 500 oil and gas sector is up more than 60% year-to-date, outperforming the broad-market index average, which is down for the year.

Will investors accept a return to higher spending and lower shareholder returns? They will not, say portfolio managers and investors.

“As an investor, I think this is a good balance. The companies have shown they can’t be trusted,” said Chris Duncan, who tracks shale firms for asset manager Brandes Investment Partners.

Stock Markets

European stock indices are falling following Asian stock markets on Monday

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European stock indices are falling

Major European stock indices are falling under pressure from Asian markets, according to trading data and analyst commentary.

The British FTSE 100 index is down 0.71% to 7431.66 points, French CAC 40 is down 0.64% to 6667.31 points and German DAX is down 0.58% to 14456.82 points.

Why are European stock indices down? 

On Monday, investors’ attention was turned to the situation around the coronavirus in China. The country has seen a record surge in cases of coronavirus for several days in a row, and authorities have imposed a lot of new anti-coviral restrictions. As a result, Shanghai residents demonstrated on Sunday against the restrictions imposed by the authorities.

Against this backdrop, Asia-Pacific stock indexes ended Monday’s trading in the negative, which had an impact on the mood of traders in Europe.

“China will be the main driver today because any political instability in the country is a source of uncertainty and anxiety for markets,” Jaime Espejo, an equity fund manager at Imantia Capital in Madrid, told Bloomberg.

One of the main events for investors in Europe this week will be the statistical data on consumer prices in the euro area. Analysts think that, according to preliminary estimations, annual inflation slowed down to 10.4% from 10.6% in October.

Earlier we reported that the U.S. had banned imports of equipment by Huawei and several other companies from China.

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Huawei is banned in the US: the US has banned the import of equipment from Huawei and several other companies from China

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Huawei is banned in the US. The Federal Communications Commission for the first time recognized products of a lot of Chinese companies banned for import and sale because of national security risks. Commission member Carr said that China threatens U.S. interests through espionage.

Telecommunications and surveillance equipment manufactured by Huawei, ZTE, Hytera and several other Chinese companies are banned from importation and sale in the United States because of “unacceptable risks” to national security. This was announced by the Federal Communications Commission (FCC) on its website.

Huawei banned in the U.S. – what is banned?

The products of the subsidiaries and affiliates mentioned in the list of companies fall under the ban. Brendan Carr, a member of the Federal Communications Commission, called the decision unprecedented and unanimously adopted with the support of both parties in Congress. This is the first time in the history of the agency, he noted, that the distribution of communications and electronic equipment has been banned because of national security reasons.

Carr pointed out that “Communist China and other malevolent actors” are too eager to use loopholes in U.S. electronic systems to obtain sensitive information, they are trying to “compromise American interests through espionage, intellectual property theft, blackmail, foreign influence campaigns and other nefarious activities.”

Two years ago, the commission had already banned using government subsidies to buy equipment from Huawei and other Chinese companies, he recalled, and as a result many operators had refused to cooperate with such firms. But that decision left a loophole for buying equipment with private funds, and it’s time to close it, Carr said.

Huawei was put on U.S. sanctions lists more than three years ago, in May 2019. Washington accused the company of industrial espionage, stealing technology and threatening the U.S. economy. In February 2020, The Wall Street Journal, citing statements from U.S. officials, reported that Huawei had covert access to cell phone networks around the world.

The CIA believes Huawei was funded by Chinese intelligence, the Chinese Armed Forces and the Republic’s National Security Central Committee, sources told The Times. At the same time, the FBI believes that Huawei equipment installed on cellular towers near US military bases can jam and intercept Defense Department communications, including those used by the US Strategic Command, which is responsible for nuclear weapons.

Earlier, we reported that Bloomberg named the most profitable stock market in 2022.

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Stock Markets

What is the most profitable stock market? Bloomberg called it the most profitable stock market in 2022

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what is the most profitable stock market

What is the most profitable stock market? The stock market of Turkey, which is the most profitable stock market in the world, has become the growth leader this year, ahead of U.S., European and Asian platforms, Bloomberg wrote. The benchmark index Borsa Istanbul 100 (BIST 100) since the beginning of the year rose 78% in dollar terms.

In lira terms, the index, which includes shares of the 100 largest Turkish companies listed on the Istanbul Stock Exchange, has risen by more than 150% since January. This was the best result since 1999, the publication calculated. Most European financial markets have shown negative dynamics this year.

What is the most profitable stock market?

Turkey’s stock market hit an all-time high in November 2022 as private investors invested in Turkish assets to protect against high inflation. The Borsa Istanbul 100 index rose to a new record high of 4,784 points in trading on Nov. 16. During trading on Tuesday, Nov. 22, the BIST 100 index gained 3.6 percent to trade at 4,734 points.

Domestic investors are investing in stocks as Turkey’s central bank pursues a policy of lowering interest rates to spur economic growth, even as the country’s inflation rate exceeds 80 percent. Despite high inflation, the country’s regulator has conducted monetary policy easing cycles in 2021, which goes against current monetary policy. The rate cut has helped weaken the Turkish lira and turned equities into one of the few income-generating havens for investors.

Inflation in Turkey surpassed 85% in October for the first time in 25 years, and while the country’s central bank predicts it could fall to 65.2% by year’s end, price growth remains among the highest in the world.

Stocks have become favorites of Turkish investors. The number of stock trading accounts opened by private investors rose 32% this year to 3.1 million as of Nov. 18, according to Turkey’s Central Securities Depository.

According to Evren Kirikoglu, founder of Istanbul-based Sardis Research Consultancy, Turkish stocks are likely to remain attractive to investors for at least the first half of next year, even as inflation in the country begins to decline.

Earlier we reported that the U.S. stock market was up more than 1% for the day.

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