A sustained rise in global oil prices has U.S. shale producers pondering something few expected to be considering after last year’s tumble: how to allocate rising cash flows among new production, dividends and stock buybacks.

U.S. shale producers will generate about $73.6 billion in cash from operations this year, up nearly a third over last year, according to data firm Rystad Energy, based on oil selling for $50/bbl.

Shale patch results that begin rolling out on Feb. 2 with ConocoPhillips Co. are expected to remain in the red, but lower spending and oil and gas price gains will deliver what is expected to be the start of stronger cash flows. Producers that pledged to hold down production may be tempted to pump more.

"It is going to be a banner year for free cash flow to shareholders," predicted Dane Gregoris, a director at energy consultancy Enverus.

Larger firms should generate cash margins of 10% to 20% of revenue this year, he estimates, equivalent to technology or industrial firms.

Investors have raised their views of deeply indebted firms including Continental Resources Inc. and Occidental Petroleum Corp., expecting operating gains to accelerate debt reduction. Chesapeake Energy Corp. bankruptcy restructuring allow it to emerge with a $5.13 billion value, twice increased while under court protection.

Drilling or Dividends

Investors will be listening for clues as to how much of the income will be assigned to shareholder payouts, and how much put back into drilling new wells and expanded infrastructure. Oil and gas rigs rose by five last week to 375, the highest level since May but still about half the level of a year ago.

“Any measure that reflects the willingness by management to return money to investors is a very attractive proposition,” said Ben Cook, portfolio manager of the Hennessy BP Energy Fund. “Up until this point any marginal cash that's generated generally has gone back into the ground.”

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One idea from last year—variable dividends that rise or fall with cash flow—will be a hot topic on coming earnings calls. Pioneer Natural Resources Co., Devon Energy Corp., ConocoPhillips, and Cabot Oil & Gas Corp. all floated adding a flexible payout as market conditions allowed, amid the market decline.

Devon plans to pay a variable dividend this year, Pioneer expects to start next year, spokespeople said. Cabot did not respond to a request for comment. ConocoPhillips continues to weigh a flexible payout, a spokesman said. Analysts expect the company will first resume share repurchases.

In the third quarter, a group of 33 U.S. shale producers generated $2.6 billion in free cash flow—the group’s strongest performance since the start of the fracking boom. It came as they cut spending to the lowest in a decade, according to data from the Institute for Energy Economics and Financial Analysis.

Free Cash Flow fo US Shale Producers Graph

For most shale producers, “2021 is the resetting of balance sheets,” said Matthew Portillo, an analyst with investment bankers Tudor, Pickering, Holt and Co. “Most excess free cash flow will go to debt repayment.”

Variable dividends will become commonplace by 2022 as oil prices climb, Portillo said. Investors, he said, “drastically prefer a focus on free cash and dividends” over growth in production.

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