E&P companies need to prove they can be competitive, analysts say

By Michael Bellusci on 6/6/2019

TORONTO (Bloomberg) -- The Russell 3000 reconstitution later this month will be key for energy companies vying for investor attention, given an already low weighting in the index, according to Barclays Capital Inc.

"With Energy likely to remain under 5% of the Russell 3000 and heavily weighted towards the Value indices following the Russell reconstitution this month, there is more burden on E&Ps to appeal to value investors," analysts William Thompson and Jeanine Wai told clients in a note.

The largest energy stock-weighting is held by Exxon Mobil Corp. at about 1.1%, sitting below tech giants including Microsoft Corp. and Apple Inc. at 3.4% and 3.1%, respectively. Energy as a whole holds a 4.6% weight, second least to materials and processing, according to data compiled by Bloomberg. FTSE Russell’s preliminary U.S. index additions and subtractions will post on June 7, and be made final after the market close on June 28.

Exploration & production companies must at the “very least, prove they can be competitive with other Russell Value constituents in terms of” free cash flow yields. Barclays’ analysis suggests Diamondback Energy Inc., Encana Corp., Marathon Oil Corp., Devon Energy Corp., Noble Energy Inc., and Continental Resources Inc. are capable of doing so near "strip pricing while maintaining double-digit oil growth."

One kicker is that E&P companies must prove they’ll remain fiscally responsible, the bank noted. "But the onus will be [on] E&Ps to prove capital discipline is real before they will likely get buy-in from generalist investors."

In a move to attract more investors, Oklahoma City-based Continental Resources earlier this week approved a $1-billion share buyback over the next 18 months and introduced a dividend for the first time. Management said it has gained confidence in the company’s cash flow over the next five years. Shares gained 15% on Tuesday.

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