30 BARRON’S September 16, 2019
INCOMEINVESTING n By Lawrence C. Strauss
Dividends Are Coming, Haltingly, to the Oil Patch
EXPLORATION-AND-PRODUCTION COMPANIES
typicallyhaven’tprioritizeddividendsand
share buybacks. There are signs that
that’s shifting.
Eager to capitalize on the U.S. shale
boom,E&Pcompaniespiledondebtasex-
pensesoutstrippedtheircashflow.Capital
returns to shareholders often took a back
seat to pouring money into production
growth,helpedbymergersandacquisitions.
“It was the rare company that self-
fundedeverything,”saysJohnDowd,man-
ageroftheFidelitySelectEnergyPort-
foliofund (ticker: FSENX) since 2006.
Now,someofthesefirmsarematuring
andchangingtheirwayswhenitcomesto
capitalallocation,potentiallysignalingbet-
ter days ahead for income investors.
Parsley Energy(PE), a smaller E&P
companythatoperatesinthePermianBa-
sin in Texas and New Mexico, last month
initiated a quarterly dividend of three
centsashare.Itisn’tmuch,withayieldof
0.7%, but it’s a start.
“It underscores management’s confi-
denceintheabilityofthecompanytostart
generating free cash flow on a sustained
basis,”saysGabeDaoud,aseniorenergy
analystatCowen.
Beingmorereceptivetoreturningcapi-
tal to shareholders is occurring among
someofthebiggerplayersintheindustry,
as well. In February,Concho Resources
(CXO) initiated a quarterly dividend of
12.5 cents a share. It also yields a paltry
0.7%, but the dividend marks a shift in
capital-allocation priorities.
Meanwhile, Continental Resources
(CLR) plans to launch a quarterly dis-
bursement of five cents a share in the
fourth quarter, which would be a yield of
about 0.6% based on the recent stock
price.
What has changed?
Dowd cites a few key developments
that have altered how these firms think
aboutcapitalallocation.Therehasbeena
“maturationoftheshalebusinessmodel,”
he says, and “the companies are slowing
into more of a steady-state business” ap-
proach. That means less reinvestment—
capital spending, in particular—for ex-
panding production.
Anotherdriverofthesector’scapital-al-
location evolution is that Wall Street “has
beendemandinganimprovementofreturn
on capital,” says Dowd. “It’s difficult to
improve the return on capital when they
are outspending the cash flow.”
DavidDeckelbaum,aseniorenergyan-
alystatCowen,saysthat“inthepasttwo
years,investorstiredoftheincessantcap-
ital raising,” and “you are seeing an em-
phasis now on capital discipline.”
Deckelbaum says that share buybacks
andpayingdowndebtwillbethetopcapi-
tal-spendingprioritiesamongthesecompa-
niesoverthenextfewyears,moresothan
dividends. These companies, he says, are
“in the first or second inning of a transi-
tion to a more return-focused industry.”
But investors aren’tbuying it yet, as
evidenced by the poor overall stock per-
formanceandlowervaluations.Thoughit
has outperformed in the past month, the
SPDR S&P Oil & Gas Exploration &
Productionexchange-tradedfund(XOP)
isdownabout8%thisyear,comparedwith
a 19% gain for the S&P 500 index.
Evenwithmoreemphasisoncapitalre-
turns, many companies in the sector still
sport puny dividend yields that are well
belowtheS&P500’saverageofabout2%,
as the accompanying table illustrates.
Sowhyisn’tthereabiggerpriorityon
dividends?
It’sacyclicalbusinessthat’ssusceptible
to swings in commodity prices. The buy-
backspigotcanbeturnedupordowneach
quarterwithouttoomuchpushback,buta
dividend cut sends a bad message to the
market.“Institutingalargefixed-dividend
policy appears to be overly onerous, at
leastatthisstageinthecy-
cle,”saysDeckelbaum.
Dowd has several E&P
companiesamonghistop10
holdings. They include
EOGResources(EOG),PioneerNatural
Resources (PXD), and ConocoPhillips
(COP).
Pioneer has aggressively boosted its
dividendlately.InAugust,thecompany’s
boarddeclaredaquarterlydividendof44
cents a share, up from an eight-cent an-
nualpayoutasrecentlyas2017.Thestock
was recently yielding 1.3%.
During the company’s second-quarter
earnings call last month, finance chief
RichardDealysaidthatPioneerwantsits
dividendyieldtobecompetitivewiththat
of the S&P 500 “as soon as possible.”
EOG has boosted its dividend aggres-
sively in recent years, as well. The stock
yields1.4%.InMay,thecompany’sboard
declaredaquarterlypayoutof28.75cents
a share, up 30%. A little over a year ago,
EOG boosted its quarterly dividend by
19%, to 22 cents a share.
“Wearecommittedtothedividend,”op-
eratingchiefLloydW.Helmssays,adding
thatEOGdidn’tcutitsdividendduringthe
downturn—notably when oil prices came
under pressure in 2014 and 2015.
Anothercompanyinthesectorthathas
regularly increased its dividend isCabot
Oil & Gas(COG), most recently to nine
cents a share on a quarterly basis. The
stock yields nearly 2%.
“The story that used to be told was,
‘Lookhowfastwecangrowproduction,’”
says Stewart Glickman, an energy stock
analyst at CFRA Research. “That has
givenwayto,‘Lookathowmuchcashflow
we can return.’”
Dividend
Payments,
pageM35
Drilling for Dividends
Dividends haven’t been a priority for the exploration-and-production sector, but that’s shifting in some cases.
Recent Dividend Market 1-Year Payout
Company /Ticker Price Yield Value(bil) Return RatioApache/ APA $23.74 4.2% $8.9 -43.3% 56.5%
Cabot Oil & Gas/ COG 18.59 1.9 7.7 -13.7 21.0
Concho Resources/ CXO 75.24 0.7 14.9 -43.0 N/A
ConocoPhillips/ COP 56.18 2.1 61.0 -19.6 25.5
Continental Resources/ CLR 33.09 0.6 12.0 -44.7 N/A
Devon Energy/ DVN 24.85 1.4 10.0 -38.1 23.3
Diamondback Energy/ FANG 99.43 0.8 15.7 -10.8 8.2
EOG Resources/ EOG 80.53 1.4 46.4 -28.9 13.7
Marathon Oil/ MRO 12.90 1.5 10.4 -35.8 28.2
Noble Energy/ NBL 24.30 2.0 11.4 -14.2 47.8
Occidental Petroleum/ OXY 46.09 6.9 40.2 -36.5 60.8
Pioneer Natural Resources/ PXD 134.97 1.3 22.1 -17.1 5.1
Note: N/A=Not Applicable. Data as of Sept. 10. Payout ratios are based on the most recent fiscal year. Concho Resources and
Continental Resources recently initiated dividends. Source: FactSetSue Ogrocki/AP Photo