‘PRICES REIGN ABOVE ALL’
Citi says it has found ‘predominant variable’ for strong performance of oil stocks
UNITED States oil drillers started the year ushering in a new era of shareholder returns with promises of billions of dollars in share buybacks. To that, they added debt repurchases and then shovelled money into drilling budgets as they raced to sink more wells.
None of it mattered, according to Citigroup Inc, compared with the price they could collect for their oil.
A study of 31 exploration and production (E&P) companies found the “predominant variable” for the best-performing stocks in the group this year had been the price that companies realised for their barrels after adjusting for shipping costs and other factors, said Citi analyst Robert Morris in a note to clients on Wednesday.
Despite a lot of earnest talk from oil executives this year about shareholder returns and fiscal discipline, little else — not cash flow growth, production and capital-spending guidance, debt metrics, dividends or buybacks — was a “distinguishable factor” in performance, Morris wrote.
“Oil prices reign above all,” he concluded.
“Interestingly, return of capital to shareholders has not exhibited any clear correlation since second quarter earnings kicked off,” Morris wrote.
Companies that announced share repurchases as well as the three that increased dividends underperformed a Citi index tracking the sector.
“Thus far in 2018, E&Ps with higher oil-price realisations and higher oil-production mixes have generally outperformed,” Morris wrote.
“No such clear pattern exists with the other operating parameters.”