April 12, 2018 Read More →

Investors Not Convinced U.S. Gas- and Oil-Drillers Are A Good Bet

S&P Global Market Intelligence ($):

Investors are taking a wait-and-see attitude toward the stocks of the top U.S. shale oil and gas drillers and are unsure if those companies will keep spending under control as the price of oil goes higher, analysts said.

Nearly half of the 22 shale oil and gas drillers in an analysis by S&P Global Market Intelligence have double-digit percentage spending increases built into their 2018 budgets, although the group as a whole is increasing spending by only 3% this year.

An equally weighted index of all 22 stocks in the group lost 3% over the 12 months to April 10, while the benchmark S&P 500 gained 13%. “E&P stocks underperformed the broader market and oil prices during 4Q17 reporting season, a 2-year trend extending,” Stifel Nicolaus & Co. analyst Michael Scialla told his clients March 28.

“We’ve heard the capital discipline mantra before; this time may be different,” Barclays oilfield services analyst William Thompson said April 11. “Large E&Ps are spending 100% of cash flow with smaller E&Ps spending 105%, a contrast to historical averages of 118% and 155% of cash flows, respectively,” Thompson said. “E&Ps have a long history of out-spending (including the last 3 years), but a behavioral shift may be in store since investor demands for higher returns really hit a fever pitch last September.”

Investors rewarded companies such as Cabot Oil & Gas Corp. and RSP Permian after their fourth-quarter 2017 results showed they had figured out how to thread the needle of producing increasing volumes of oil and gas while keeping spending under control, Williams Capital Group LP analyst Gabriele Sorbara told clients March 19. “On the flip side, investors were hyper-sensitive to larger [capital expenditure] budgets and lower production profiles resulting in less efficient programs and unexpected outspends,” Sorbara noted.

“While E&P management teams have promised investors capital discipline, 61% of our 33-company universe reported 4Q17 capex above consensus and 58% guided 2018 capex above Street averages,” Scialla said.

More ($): Skeptical Investors Are Saying ‘Show Me’ On Shale Oil, Gas Spending


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