By Michael Bellusci
Oil at $100 a barrel is long gone. Investors have exited their losing positions. And energy stocks in the S&P 500 now hold a weight of barely 4%, down from over 10% at the start of the decade.
As 2019 comes to a close, investor apathy in the sector is at a decade low, according to Tyler Hardt, founder of Pelican Bay Capital Management LLC. But the year ahead could be a turning point, he said.
With the American shale revolution contributing to an oversupply, the collapse of oil prices and stocks triggered the fall of several titans including gas driller Chesapeake Energy Corp. and oil servicer Weatherford International PLC.
Struggling with profitability and volatile commodity prices, the sector has seen a flight of capital in what was once a hot bed of merger and acquisition activity. One analyst even characterized a recent marketing trip as having “plenty of coffee time between meetings.”
Capital Discipline
With the collapse of oil in late 2014, energy firms have been slowly adopting the mantra of “capital discipline,” or a focus on steady returns and profitability, after being pushed by investors.
“Without fresh capital to cover their widening cash burn, the E&Ps [exploration and production companies] were finally forced to live within their means and take a sharp axe to their capital budgets,” Hardt said in an interview. He has held positions in drillers such as Devon Energy as recently as the firm’s third quarter, according to filings.
Shareholder-friendly game plans are evident in recent moves by drillers including Continental Resources Inc., which plans to pay a dividend for the first time, and ConocoPhillips, which has a 10-year plan to buy back $30 billion of shares, equivalent to about half of its current market capitalization.
Turning Point?
Arguing things can’t get much worse, optimists are beginning to enter the picture. Citi is readying for a rotation into E&P stocks, while Goldman Sachs thinks energy is entering a “bottoming phase” in 2020.
The days of relentless domestic production growth are ending, industry pioneers said in November. As such, a key focal point for investors will be calling on shale producers to shut down rigs and stop burning through cash.
“The dearth of new conventional projects beyond 2020, combined with slowing US shale growth will likely catch the world by surprise and usher in a new era of oil scarcity and higher prices,” Hardt said. He thinks 2020 “will most likely be the turning point.”
Yet the industry’s challenges are far from over with the rise of environmental, social and governance investing. Looking ahead, drillers will likely face increasing scrutiny regarding the environmental impact of their operations.
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