Oil-and-gas companies are pumping out billions of dollars in cash because of high commodity prices. Many of them are using that cash to buy back their shares.
Share repurchases can be good for shareholders because they goose earnings per share, spreading a set amount of earnings power over a smaller number of shares.
But there is also a downside to repurchases. If shares are pricey, they can be an inefficient use of cash. Historically, most companies buy their own shares at the wrong time, overpaying when they could be investing in growth or salaries, or otherwise improving their businesses. And oil and gas producers tend to have the worst timing of all, according to Wells Fargo analyst Nitin Kumar.
“We think this emphasizes the cyclical nature of the industry and why investors should be concerned about explorer and producer management teams using cash cows from temporarily elevated commodity prices to repurchase shares that are on multiyear highs,” Kumar wrote in a note on Friday.
That said, buybacks can still work for some companies, given that oil stocks still aren’t fully reflecting the large run-up in oil prices. Kumar looked at which oil and gas producers would be smart to buy back shares, and which should probably hold off for now. Wells Fargo reviewed each company based on several metrics, including the implied oil price reflected in the stock price, the stock’s price momentum and its relative valuation.
Three stocks rose to the top of the pack, in part because they still seem undervalued based on their prospects.
Houston-based natural gas producer Coterra Energy (ticker: CTRA) is one company that Kumar thinks should keep buying back shares, largely because its shares are not fully reflecting the high price of natural gas. Coterra is somewhat limited in how many shares it can buy back because it has already announced a significant variable dividend plan, but its current authorization allows it to repurchase about 6% of the float.
CNX Resources (CNX), another natural gas producer, also scores near the top, because its stock is also not fully reflecting high gas prices. Its current buyback authorization allows it to repurchase up to 30% of its float. And Denver-based oil producer Centennial Resource Development (CDEV) is likewise well-positioned to buy back shares, and has authorization to buy back about 20% of its float.
On the other hand, several companies should probably hold off on buybacks for now, Kumar asserts. Those include Antero Resources (AR), Pioneer Natural Resources (PXD), Devon Energy (DVN), and EQT (EQT). For Antero and EQT, both of which announced $1 billion buybacks recently, the risk-reward is looking less favorable at current prices, according to Kumar. And Devon’s valuation multiples have been expanding quickly. Pioneer’s stock price appears to already be reflecting high oil prices, Kumar writes.
Write to Avi Salzman at [email protected]
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