Why do oil companies repurchase stocks?
The oil and natural gas industry is a capital intensive industry and devotes the largest share of its earnings to adding new property and equipment to its upstream and downstream operations. It also repurchases stock as a means of further adding value for its shareholders. As with many other industries and companies, it is the responsibility of company officials to build value for shareholders through stock repurchases and paying dividends.
When companies repurchase stock, they are supporting the company’s equity. This, in turn, helps the owners of the companies—retirees, future retirees, and millions of middle class Americans who have invested their hard-earned savings on the expectation of a reasonable return on their investment.
While the share of stock repurchases in the oil and natural gas industry has increased in recent years, it has averaged nearly half of the average for the S&P Industrial group. For the last 13 years, the oil and natural gas industry spent an average of 34 percent of net income on stock repurchases, while the rate for the S&P Industrials was 66 percent.
In addition to repurchasing stocks to build equity, the oil and natural gas industry paid out approximately $35 billion in dividends distributed to American shareholders in 2010 alone. Contrary to popular belief, America’s oil and natural gas companies aren’t owned by a small group of insiders. Instead, less than 3 percent of industry shares are owned by corporate officers and board members. The rest is owned by regular, middle class Americans such a as teachers, policemen and women, and firefighters.
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