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Oil Majors Borrow Billions for Share Buybacks as Production Slows

by Daisy

U.S. oil drilling activity has dropped to near post-pandemic lows, with a prolonged decline in the rig count driven by low oil prices and rising inflationary costs. For over two years, the number of active rigs has been on the decline, reflecting the industry’s shift towards prioritizing shareholder returns over reinvestment in new drilling operations. Even as oil companies continue to funnel funds into dividends and stock buybacks, some are resorting to borrowing to maintain these payouts rather than expanding production.

Declining Rig Count Amid Cost Pressures

The latest data from Baker Hughes indicates that U.S. oil drilling activity is barely above post-pandemic lows, with the active rig count falling by two week-on-week to 478. This marks a stark decline of 149 rigs from November 2022’s peak and 73 rigs lower than the level seen during President Trump’s inauguration in 2017. As companies adapt to lower oil prices and rising operational costs, drilling activity has struggled to recover despite efforts to deregulate the industry and expand production.

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Experts at Standard Chartered forecast that drilling will remain subdued throughout 2025, as oil prices continue to languish in real terms, failing to incentivize major expansion efforts. This trend is compounded by broader structural shifts within the U.S. shale industry, including consolidation and an emphasis on productivity gains rather than aggressive expansion.

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Shareholder Returns at the Forefront

Despite the reduced drilling activity, oil majors have consistently prioritized shareholder returns, including increasing dividend payouts and buying back shares. However, as profits fall due to declining oil prices, these companies are increasingly turning to borrowing to meet investor demands. Bloomberg reported that four of the world’s five largest oil companies borrowed $15 billion in the third quarter of 2024 to fund share buybacks, with ExxonMobil, Chevron, TotalEnergies, and BP among the major players relying on debt to fulfill shareholder expectations.

While borrowing for buybacks is not unusual in the oil sector, the outlook for oil prices suggests that this cash shortfall could persist. With many investors expecting immediate returns, the challenge for oil majors lies in balancing shareholder demands with the financial realities of a prolonged price slump.

Structural Challenges to Production Growth

Even with deregulation efforts under the Trump administration, which include the repeal of drilling restrictions in the Arctic and offshore U.S. waters, U.S. oil production growth is not expected to ramp up quickly. Structural changes in the shale industry, including a focus on operational efficiency and mergers and acquisitions, have shifted the landscape significantly since 2017. U.S. oil production peaked at 13.4 million barrels per day (mb/d) in August 2024, a slight increase over the previous year, but growth has been slow compared to the pandemic-era lows.

The dynamics of U.S. shale production, particularly in the Permian Basin, make it increasingly difficult to sustain long-term production growth. While technology and efficiency gains have allowed for continued growth, the geology of key basins such as the Permian is deteriorating, which could impact future production. Goldman Sachs warned that the Permian’s rig count has already declined by nearly 15% since last year, and further reductions are expected as the region matures.

The Road Ahead for U.S. Oil Production

Looking forward, oil majors are likely to face continued challenges in balancing short-term shareholder returns with long-term production goals. While drilling efficiency gains have allowed U.S. shale to grow despite a declining rig count, experts suggest that without a significant increase in oil prices or further technological breakthroughs, the industry’s growth will remain limited in the years to come. Standard Chartered projects that U.S. liquids growth will slow even further in 2025 and 2026, reflecting the broader stagnation in U.S. oil production.

In conclusion, as U.S. oil companies prioritize financial returns over production expansion, borrowing to fund buybacks, and facing diminishing growth prospects in key regions like the Permian Basin, the future of U.S. oil production remains uncertain. Despite efforts to deregulate and expand drilling, industry leaders face significant hurdles in achieving meaningful production growth without a sustained rebound in oil prices.

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