The stocks of shale-oil drillers were on the rise.
Nicholas Piccillo/Dreamstime.comOil companies are reporting their worst earnings results in years, but their stocks are on the rise. In fact, the energy sector is up 4% on the week, better than any other sector in the market.
It is a sign that investors have moved on from the disastrous second quarter and are starting to pick winners for the future. Among the companies winning strong reviews for their earnings reports are shale-oil drillers Devon Energy (ticker: DVN), Pioneer Natural Resources (PXD) and Diamondback Energy (FANG).
They aren’t the only ones getting the benefit of the doubt. Major European oil companies have also been up over the past two days following BP’s (BP) announcement on Tuesday that it will cut its dividend in half, a decision that was less drastic than some analysts had expected.
It helps that the price of oil has been rising. On Wednesday, crude futures jumped. Brent crude, the international benchmark, rose 3.8% to $46.11. as West Texas Intermediate crude futures rose by 3.9% to $43.34.
Oil inventories fell over the past week, the U.S. Energy Information Administration said on Wednesday. Oil prices also rose on Tuesday after an explosion in Beirut. There were initial fears that the blast was caused by an attack, though more evidence now indicates it was an accident.
For some U.S. producers, it has also helped that they are returning cash to shareholders, or committing to return it in the years ahead. Devon Energy was up 9.3% near midday Wednesday after announcing a $100 million special dividend—26 cents per share—connected to the earlier-than-expected sale of its holdings in the Barnett shale play in Texas. Devon also impressed Wall Street by producing more oil than expected despite drastic cuts in capital spending. And its projections for the rest of the year indicate that trend will continue.
Devon reduced its capital-spending guidance while increasing its production guidance, Raymond James analyst John Freeman noted. And Devon is reducing debt. “Notably, Devon plans to repurchase up to $1.5 billion in outstanding debt which should result in a $75 million reduction in annual interest expense,” he wrote.
Pioneer Natural Resources also was rising on Wednesday after posting better-than-expected production and in-line earnings. Shares were up 2.4%. Its production beat expectations by 7% even as its capital expenses came in 11% below expectations.
In addition, Pioneer plans to return more cash to shareholders.
“Pioneer announced a long-term plan targeting 10%+ shareholder total return,” Freeman wrote. “The plan involves cash flow reinvestment of 70-80% that will deliver 5% plus oil growth and the remaining cash flow delivered to shareholders through the combination of a growing base dividend and variable dividend.”
Diamondback Energy also showed it can be more efficient, reporting “impressive reductions in well costs and cash operating costs, both of which we believe may represent the lowest in the Permian,” according to Truist analyst Neal Dingmann. “Get ready for months and months of free cash flow,” he wrote. Diamondback shares were up 3.1%.
The Dow Jones Industrial Average was up 1.2%.
Write to Avi Salzman at avi.salzman@barrons.com
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