A derrickman secures a length of drill pipe
Daniel Acker/Bloomberg
After years of outspending their cash production, oil companies are now living within their means. Many are generating enough cash flow to cover their debt, dividends, and production budgets with room to spare. It doesn’t hurt that oil and gas prices have rebounded and are trading at multiyear highs.
Investors have been rewarding companies that are doing a particularly good job of pumping out free cash flow and increasing their shareholder returns.
Barron’s screened for the companies that are expected to increase their free cash flow the most in the next quarter from the last quarter. We looked at energy companies with market caps over $5 billion in the S&P 1500. The six top performers were Cabot Oil & Gas (COG), Range Resources (RRC), EOG Resources
(EOG), Pioneer Natural Resources (PXD), Devon Energy (DVN), and Cimarex Energy (XEC).
Cash for Oil
These six energy companies are expected to increase their free cash flow more than peers in the coming quarter.
| Company / Ticker | Price | Market Cap (Bil) | Stock % Change YTD | Expected FCF Growth* |
|---|---|---|---|---|
| Cabot Oil & Gas | COG | $20.34 | $8 | 25% | 446% |
| Range Resources | RRC | 20.38 | 5 | 204 | 155 |
| EOG | EOG | 78.10 | 46 | 57 | 116 |
| Pioneer Natural Resources | PXD | 162.03 | 40 | 42 | 59 |
| Devon Energy | DVN | 33.09 | 22 | 109 | 58 |
| Cimarex | XEC | 81.39 | 8 | 117 | 55 |
*Quarter over quarter.
Source: Factset
Natural gas prices have jumped to seven-year highs above $5 a million British thermal units, or BTUs. Gas inventories have been running low, as some companies have cut back on production and demand improves. On Monday, prices were up 7.7%. The upswing has lifted several natural gas producers. Cabot Oil & Gas, which is based in Houston but produces mostly in Appalachia, is expected to pump out significantly more free cash flow in the current quarter than it did in the prior one. Its stock has shot 40% higher in the past month.
For natural gas companies, their ability to benefit from price increases depends on whether they had previously hedged their production at lower prices. Those that hedge less production will be able to turn more of that price increase into cash. As of February, Cabot had hedged a little less than half of its 2021 production. But it had not hedged its 2022 production as of the end of the second quarter. Cabot CEO Dan Dinges said on the company’s latest earnings call that it might do so before the end of the year, though investors are unlikely to know the extent of those hedges until the company’s next earnings call.
Range Resources, another natural gas producer that extracts gas in Appalachia, has benefited from the price increase, with its stock rising 44% in a month. Range had already hedged some of its 2022 production, but had also left some unhedged to get the benefit of higher prices.
Oil prices have also been on the upswing lately, and U.S. producers are seeing major benefits. Among those are EOG, Pioneer Natural Resources, Devon Energy, and Cimarex Energy. All of those companies have participated in mergers, acquisitions, or land deals over the past year, bolstering their positions as the oil-and-gas industry consolidates. (EOG has not made any big deals, but has done some smaller acquisitions.) Most of those deals were stock transactions, meaning the companies did not add debt. Their hope is that they can add to production without also adding leverage — which has been a problem in the past.
Two companies on this list may soon become one. Cimarex plans to merge with Cabot in an all-stock deal that shareholders are expected to vote on this week.
Write to Avi Salzman at [email protected]
