Where do oil and gas companies invest their money?

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Oil and gas producers are sitting on record amounts of cash as soaring oil prices push profits higher.

According to a new report from Evaluate Energy, major U.S. and Canadian oil and gas producers saw their free cash flow hit $29.8 billion, a 34% increase from the fourth quarter of 2021.

The report looked at spending for 82 U.S. and Canadian oil and gas producers — each producing more than 5,000 boe/d in Q1 2022 — and found that while capital spending also increased significantly in Q1 2022, rising commodity prices and the dramatic jump in operating cash flow exceeded expenses.

Some experts (Oil and Gas IQ included) have speculated that the long-term consequence of Russia’s invasion of Ukraine would be an acceleration of the energy transition as nations seek to bolster their vital energy dependence. This would require increased investment and spending in new energy sources – such as renewables, biofuels and hydrogen – and technologies such as carbon capture, storage and utilization (CCUS).

But where are oil and gas producers funneling their new money?

There has been a significant increase in capital spending, with more than 60% of companies assessed in the report increasing spending in the first quarter and this is the first time that all non-producing oil sands producers have increased spending on capital.

Investors are also benefiting from sustained oil prices. Dividend payments to shareholders represented 27% of cash used.

Total debt repaid peaked at $10 billion, but strong operating cash more than offset debt repayment.

“Debt repayment was only 25% of all cash used in the first quarter,” wrote report author Mark Young, principal analyst at Evaluate Energy. “This relatively low percentage at a time of record free cash flow could indicate that the most pressing debt priorities in the industry are being addressed, even if the dollar amounts involved in repayment expenses debt remain high.”

Industry watchers believe oil prices could fall later this year as the specter of a global recession looms. But, in the meantime, Mark Young expects the spending outlook to be uncertain.

“Budgets are subject to change. Events in Ukraine and sanctions against Russia could lead some producers to further increase 2022 budgets. We anticipate that these increases are likely to be tempered given general geopolitical uncertainty, unclear long-term demand projections and constraints in the supply side,” he writes.

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