Returning cash to shareholders through stock buybacks has failed to halt the collapse of the stock prices of Appalachia's shale gas drillers in the face of a dreary futures gas price tape, an S&P Global Market Intelligence analysis found Oct. 1.

Prices for the benchmark monthly NYMEX Henry Hub futures contract are below $3/MMBtu for the next seven years or longer, according to S&P Global Market Intelligence data, and stock prices for the Appalachian group of drillers have been on a slide since 2017, despite more than $2 billion of share repurchases.

Buybacks are preferred over dividend increases as the way to send value back to shareholders of small-cap companies, according to a May survey of investors by Raymond James & Associates. "Share repurchase was the most popular, nearly reaching the halfway mark with 48% of the vote. Following share buybacks, regular dividend received a third of the votes and special dividend almost a fifth," oil and gas analyst John Freeman reported.
Share repurchases make sense to smaller companies tied more tightly to commodity prices, Raymond James said, because a significant amount of outstanding stock can be retired and the event is not taxable, nor does it have to be repeated, like a dividend.
Barclays noted Sept. 9 that there "appears to be little appetite for companies to overextend themselves on distribution policies," adding that "buybacks can augment payouts while also providing financial flexibility."
A regular dividend payment was preferred by large-cap investors in Raymond James' poll. Dividends would signal that the shale gas industry is changing. "The overwhelming preference for regular dividends serves as confirmation of the shift from an aggressive growth model of burning through cash, while occasionally returning windfall profits from commodity spikes or asset sales to a 'manufacturing' model that delivers consistent steady returns to shareholders," Raymond James said.
Five of the six drillers that initiated stock buybacks over the last two years have lost more than half their stock value over the same period, demonstrating the powerful influence of negative gas commodity pricing. The sixth, Cabot Oil & Gas Corp., has repurchased the most shares, more than $1.3 billion, and has pledged to return at least half its free cash to shareholders. Nonetheless, Cabot shares lost 19% since the start of 2017 and the end of the third quarter.

Analysts at energy investment bank Tudor Pickering Holt & Co. told their clients Sept. 30 that gas market fundamentals are bottoming out and that they expect stock values to rise ahead of natural prices. "It's ultimately slower growth or declines that should finally put a floor on the equities and as we saw in 2015/16 stocks should start to move before the commodities do as investors look towards the recovery in gas," the analysts wrote.
"We would be actively buying [Cabot] around these levels (and would own EQT Corp. for beta exposure), but tactically are watching the next few months play out before considering names further down the risk spectrum," TPH said.
