Barclays’ re-initiation of E&P stock coverage includes a message to anti-E&P investors: “Unapologetic oil and gas.”
The start is on 18 hydrocarbon tickers—a mix of integrateds and independents, ranging from Exxon Mobil to Antero Resources, plus minerals firm Sitio Royalties.
E&P “companies have done what investors demanded—and more,” new Barclays analyst Betty Jiang wrote after markets closed on April 9. “We believe the sector offers a better value proposition than ever before.”
Among the 18 stocks, “we see strong balance sheets, low cash flow breakeven prices and significant free cash flow generation, with the group on pace to return some 20% of their market cap on average through dividends and buybacks over the next three years—at strip pricing.”
In contrast with the rest of the S&P 500’s sectors, she added, E&P stocks have generated twice as much free cash flow.
And they represent 7% of the S&P 500 names’ cash flow, “clearly punching above their 2.8% current weighting [in the index].”
The industry is in its seventh year of capital discipline and fourth year of returning cash, she added.
“The argument that the sector needs to ‘prove’ itself is starting to wear thin,” she wrote.
‘Reality check’
“The world needs oil and gas,” Jiang added, and this “should be met by responsible producers.”
Energy-transition targets are “significantly behind.” Many targets are set for 2030. “We believe a reality check is necessary.”
Unresolved is how to meet the energy needs of developing countries, “where more than 80% of the world’s population resides,” she wrote.
Meanwhile, a disorderly transition will mean underinvestment in both carbon-based and “clean” energy infrastructure.
Jiang said that natural gas “is a transition fuel” but added “to a degree.”
“This remains a heated debate where on one side, gas is shunned for its greenhouse gas emissions—especially value-chain emissions from methane leakage—while on the other side, coal-to-gas switching is seen as effective at reducing emissions at scale, especially given the significant improvement in methane monitoring.”
She concluded, “We believe the answer lies somewhere in between and will ultimately depend on cost.”
XOI growth
Since March of 2020, the XOI (NYSE Arca Oil and Gas Index) has grown from $511 to $2,226. The current price is the index’s highest in its 21-year history. The pre-2020 high was about $1,700 in 2014. That price was topped in 2022.
Barclays’ coverage in the oil and gas space ended last year upon the departure of analyst Jeanine Wai, who joined TotalEnergies in its investor relations group.
Jiang took the Barclays seat in October. Previously, she was head of U.S. ESG research at Credit Suisse and had been its E&P analyst from 2017 to 2020.
In February, Barclays reported it would stop financing new oil and gas projects, except in the U.S.
It is among lenders that have provided “highly confident letters” to Kimmeridge Energy Management concerning “the debt consideration required to facilitate the proposed transaction” in Kimmeridge’s bid to take over Eagle Ford operator SilverBow Resources.