Why Big Oil and Biden can’t agree on oil prices amid Russia crisis

On Mar 10, 2022

Permian Basin rigs in 2020, when U.S. crude oil production dropped by 3 million a day as Wall Street pressure forced cuts.

Paul Ratje | Afp | Getty Images

When Devon Energy announced fourth-quarter earnings on Feb. 15, the world looked like its newly comfortable, fiscally conservative oyster.

After losing nearly 90% of its value from 2014 through October 2020, the Oklahoma City-based oil and gas producer was the top-performing 2021 stock in the Standard & Poor’s 500, thanks to a concerted strategy of throttling back on exploration, squeezing costs and taking less risk. It turned a 2020 loss of $2.5 billion into a $2.8 billion profit for 2021, raising its dividend 45% and plowing nearly $600 million into stock buybacks after spending just $38 million the year before, with promises of more cash to rain on once-beleaguered shareholders soon.

“Devon generat[ed] the highest level of cash flow in our prestigious 50-year history,” CEO Rick Muncrief crowed on a conference call. “We delivered exactly what our shareholder-friendly business model was designed for, and that is to lead the industry in cash returns.”

Nine days later, Russia invaded Ukraine.

Now Devon and other producers face demands that the U.S. and Europe cut Russia off from world energy markets – not easy, since Russia’s 10 million barrels a day make it the world’s No. 3 producer of oil, and its natural gas supplies much of Western Europe’s heat and electricity. Even though a new Quinnipiac poll says 71% of Americans favor expanding sanctions on Russia to include its oil and gas industry, U.S. oil isn’t dying to pick up the slack – including Devon.

There’s little wonder why oil isn’t eager to ride to Ukraine’s rescue: The exploration industry as a whole had nearly $20 billion in negative free cash flow as recently as 2015, losing $78 billion between 2005 and 2017 as hydraulic fracking took over the industry and drove crude prices lower amid oversupplied markets and overextended drillers. Free cash flow is a financial measure that accounts for the amount oil companies invest in new wells, which is deducted from accounting profits over the expected life of the wells.

Big Oil’s rebound and reluctance to drill

Devon’s turnaround was one of the more dramatic. In 2021, it reinvested only 32% of its operating cash flow in new wells, retired $1.2 billion in debt, raised its dividend, and bought back nearly $600 million of its stock just in the fourth quarter. This year, it planned for more of the same: Another $1 billion in debt reduction and $1.6 billion in stock buybacks, a company worth $32 billion before war broke out, with only a third of cash flow being reinvested in more drilling.

The next day, Goldman Sachs analyst Neil Mehta’s bullish report on Devon didn’t mention Ukraine. No analyst had asked about it on Devon’s conference call to discuss quarterly results.

But as they said in The Godfather, just when Big Oil thought it was out, people want to pull it back in. And Devon CEO Rick…