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Analysts Ditch Tiny Shale Stocks After Market Collapses


By Michael Bellusci
May 22, 2020
(Bloomberg) –The smallest shale oil drillers have endured their fair share of pain in this spring’s energy collapse and, with ailing stock prices, analysts are finding it even tougher to cover the group.
Early Friday, energy researcher Heikkinen Energy Advisors and investment bank Tudor Pickering Holt & Co LLC, both based in Houston, discontinued coverage of Centennial Resource Development Inc., Callon Petroleum Co., and QEP Resources Inc.

Heikkinen also suspended ratings on other drillers, including Chesapeake Energy Corp., Goodrich Petroleum Corp., Gulfport Energy Corp., Montage Resources Corp. and Oasis Petroleum Inc.

Stocks with market caps below $300 million and share prices under $1 are “generally uninvestable for the majority of our client base due to their small size and low trading liquidity,” Heikkinen told clients in a note. Tudor Pickering cited a “reallocation of resources and an internal refocus of our coverage list.”

Oil & gas-focused research firms and investment banks are “pulling in resources,” said Tyler Hardt, a Florida-based portfolio manager at Pelican Bay Capital Management. An easy place to cut is “smaller-cap energy names that a lot of people don’t have hope for.”

Bankruptcies could occur before any potential mergers and acquisitions, Hardt added.

Read more: Chesapeake Revives Bankruptcy Concerns After Oil’s Meltdown

Centennial was among the exploration and production outfits touted as a potential takeout target in the past by firms including SunTrust and Tudor.

‘Non-Consideration’
At least one portfolio manager isn’t looking too deeply into the discontinued ratings. “Looking at these cancellations might actually be a non-consideration as an investor,” according to Josh Young at Houston-based Bison Interests LLC. He sees little correlation between stock performance and recommendations, adding that hedge funds still care about potential M&A targets even amid the carnage in the energy industry.

At the same time, Heikkinen isn’t completely abandoning ship. The firm intends to follow these companies by “maintaining relationships with management, updating models and providing production and financial estimates.”



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