Oil investors want companies to spend their cash on buybacks and dividends. Photograph by Ian Forsyth/Getty Image
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Investors have made it clear that they want oil companies to generate cash and return that money to shareholders.
On Tuesday, Continental Resources (ticker: CLR) stock soared 15% after management initiated a dividend and said it would buy back $1 billion worth of stock and pay off debt. Oil producers that announce almost any other major move—acquisitions, expanded capital projects—have seen their stocks fall.
Occidental Petroleum (OXY) might be the best example of this. Shareholders have jeered its acquisition of Anadarko Petroleum (APC), even though the deal is being supported by Warren Buffett.
In general, investors don’t trust oil companies to spend wisely because historically, they haven’t.
With that in mind, SunTrust Robinson Humphrey analyst Neal Dingmann evaluated oil and gas producers to determine which of them are most likely to return cash to shareholders, creating the potential for their stocks to rise.
His picks include Concho Resources (CXO), EOG Resources (EOG), Marathon Oil (MRO), and WPX Energy (WPX). Most other producers either don’t have the cash or the prospects to pay money to shareholders, Dingmann argues.
“Overall, we believe it will be difficult for the majority of our names to institute similar programs of share repurchases and dividends particularly given the current volatility in commodity prices, their current financials, and what stage/inning they are in their life cycle,” he wrote.
Marathon is already buying back shares, and could boost its dividend. The stock now yields 1.5%.
EOG has already been increasing its dividend, but “we believe that the company could potentially pursue other shareholder returns programs,” he wrote.
Dingmann doesn’t expect Concho and WPX to generate significant amounts of free cash flow until 2020, but he thinks the companies could announce some sort of cash return program before then.
He rates all of the companies at Buy.
Write to Avi Salzman at avi.salzman@barrons.com