Pioneer Natural Resources: Enhancing the Capital Return Strategy with Variable Dividends

In February 2021, Scott Sheffield, the CEO of Pioneer Natural Resources (an independent oil and gas company based in Texas), was considering the possibility of enhancing the firm’s capital return strategy by introducing a variable dividend tied to cash flows in addition to the firm’s base dividend as a way to distribute more cash to shareholders when performance was good and cash flows were high. Although oil prices had fallen precipitously to less than $20 per barrel in early 2020 due to the recession caused by the Covid pandemic, they had rebounded to more than $60 per barrel in February 2021. As a result, exploration and production (E&P) companies including Pioneer were expected to generate significantly higher profits in 2021, prompting many firms to consider ways to distribute excess cash to shareholders. Sheffield had to decide whether to adopt a new “base plus variable” dividend policy. As part of that decision, he had to decide whether it was materially different from and better than a policy with a growing base dividend supplemented with periodic share repurchases. And if he did decide to recommend a new policy to the board of directors, he had to determine the magnitude and the frequency of the variable dividend.