Independent oil and gas producers are taking steps that investors have long demanded and are seeing their share prices drop anyway, Goldman Sachs said in a sector update.
Recapping its recent meetings with energy executives, Goldman Sachs said most management teams are intent on spending less capital, even if that means seeing less growth. The firm said there is now a "downside risk" to U.S. oil growth forecasts as more companies pull back and the rig count nationwide continues to fall. Investors have frequently hit independents for their habit of unrestrained growth at the expense of shareholder returns, but the sought-after changes have not altered the stock slide that most independents have endured.
"Investor sentiment has not become more bullish, however, as falling expectations for US supply growth are matched with falling expectations for global demand growth," Goldman Sachs said.
Share price losses have been the rule, not the exception, for independents in 2019. Occidental Petroleum Corp. saw its share price dive by 46.5% from $83.13 on Oct. 1, 2018, to $44.47 at the close of the NYSE on Sept. 30. Shares of Apache Corp. slid by 46.9% from $48.36 to $25.60 over the same period.
Even companies that have been solid performers, such as Pioneer Natural Resources Co. and Diamondback Energy Inc., have been hit hard by sell-offs. Pioneer shares, which sat at $178.22 at market close Oct. 1, 2018, were down by 29.4% to $125.77 at market close Sept. 30. Diamondback shares fell by 34.3% from $136.80 to $89.91 on the Nasdaq during the same period. EOG Resources Inc., which Goldman Sachs called "a preferred generalist stock idea," has seen its stock price plummet by 42.7% from $129.49 per share to $74.22 per share over the past year.
Management teams are not expecting a rebound anytime soon, Goldman Sachs said. The firm said most Houston-based producers told the firm they expect oil prices to remain in the $55-per-barrel range in 2020, which will require the companies to remain disciplined. While the emphasis on a strong balance sheet and free cash flow may keep current investors from selling out, Goldman Sachs said that approach is not enough to draw in new stockholders.
"As the rig count continues to fall and supply growth expectations are ratcheted down, sentiment has still not improved. This is largely because capital discipline and greater focus on [free cash flow] among E&Ps are not the catalysts investors are looking for to buy stocks. Rather, investors are looking to better oil supply-demand balance where the world needs OPEC production to rise, not fall," the firm said. "And even with both managements and investors increasingly assuming US oil growth [of less than 850,000 bbl/d], demand fears are keeping investment at bay."
