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Independent oil, gas producers enjoying stock rebounds nobody can explain

The second half of 2019 had not been kind to Occidental Petroleum Corp. Even though the company had completed its $57 billion takeover of Anadarko Petroleum Corp., things were far from rosy. Activist investor Carl Icahn, angered by the hit Occidental's balance sheet took from the acquisition, was preparing to mount a challenge to oust Occidental's board of directors. Analysts were lukewarm at best on the expensive merger.

Investors had already had their say, sending the company's stock plummeting from nearly $70 per share in early April 2019 to under $38 by mid-December.

Then, without any clear reason, something changed. Occidental's shares started going up and have gained approximately 22% over the past month, closing at $46.67 per share Jan. 16. Other independents, especially those in the Permian Basin, have experienced similar upswings ― some starting as far back as October 2019. Why? Analysts and industry experts have offered differing reasons, from attractive dividends to expectations of improved profitability.

"It's hard to explain why, because while those companies are all likely to generate free cash flow in 2020, I don't think that's a big surprise at this point. And nothing happened between the end of 3Q and now to make that cash flow more likely," Morningstar analyst David Meats said. "If the rally happened after 4Q earnings I'd say 2020 guidance gave the market confidence in the [cash flow], but that isn't the case because 4Q hasn't been reported yet."

In the case of Occidental, it may be a simple market correction. Even though the Anadarko deal damaged the company's balance sheet, it added significant assets in the Permian Basin and elsewhere in the process. With its dividend intact, Occidental could still hold appeal to investors as it works to sell off assets and reduce debt.

"We think the market is starting to recognize — a bit belatedly — Occidental's ample room to delever, while at the same time fully preserving its peer-leading dividend (current yield is 6.8%)," Raymond James analyst Pavel Molchanov said. "The recent bounce in oil prices is helping, but even at lower oil prices we would still envision a healthy combination of dividend sustainability and deleveraging."

The Permian still rules

Most of the independents enjoying a rebound in share value hold a common thread: they are active in the Permian Basin. Mainstays EOG Resources Inc. and Pioneer Natural Resources Co. have seen their shares increase by more than 21% and 19%, respectively, since the start of October. Even though prices for West Texas Intermediate crude have remained fairly constant over the past four months, trading in a range between $52.47 per barrel and $63.27/bbl ― it was trading at $58.69/bbl the morning of Jan. 17 ― a number of Permian players have seen their stocks steadily rise even as prices remain modest.

"They look better now after shedding value," Rice University Professor Ken Medlock said. "But their asset positions also factor in."

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Medlock noted that a number of new oil and gas pipelines have started to come online in the Permian, reducing bottlenecks and lowering the cost producers have to pay to get their product to its intended destination ― frequently, the Gulf Coast. The lower the cost, the greater the profit, even if oil and gas prices remain stagnant.

"[Increased pipeline capacity] will improve wellhead pricing, thereby raising the value proposition," he said. "I do think it's a matter of expected profitability, which is asset specific, and these firms are Permian-heavy."

One company that had an up and down 2019 was Diamondback Energy Inc., but the Permian-only player announced stronger-than-expected production numbers of 301,300 barrels of oil equivalent for the fourth quarter of last year. That was an increase of 5% over the third quarter of 2019 and fueled a price surge during the first week of January that pushed Diamondback shares up more than 13% over the Oct. 1 price level at one point before giving back some of its gains. Company shares were still up 7.4% on Jan. 15.

"In the case of [Diamondback], the company did report extremely strong 4Q production, highlighting that the mix and volume issues in 3Q were more of a one-off than the market was probably assuming. That could have bled through to other Permian stocks too," Meats said.

One Permian power has experienced a major share rebound that has nothing to do with the basin. Apache Corp.'s stock has increased more than 38% since October 2019, and nearly all of that improvement came overnight with the announcement of a new oil play off the coast of Suriname. Apache shares closed at $25.64 per share Jan. 6, but increased nearly $7 to $32.51 by the time the New York Stock Exchange closed Jan. 7.

"Suriname remains the driver of equity performance from here, with eyes now fixated on results from the [new discovery] Sapakara West-1," Tudor Pickering Holt & Co. said.