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Rosneft shines as 2018 stock outperformer in integrated oil and gas sector

2018 proved to be a tumultuous year for energy equities, with integrated oil and natural gas companies both under-performing and outperforming the broader market.

While BP PLC, Repsol SA, Equinor, TOTAL SA and Eni SpA saw total returns increase about 1% to 9% in 2018, Rosneft Oil Co. PJSC was the outlier and out-performer, with returns at Russia's largest oil-producing company surging 29.9%.

Apart from ramping production and working to reduce massive debt incurred from years of heavy spending, following in the footsteps of many of its peers, Rosneft returned value to shareholders in 2018, launching a $2 billion share buyback program shortly after midyear that will run through the end of 2020. Buying back stock generally makes the company's existing stock more valuable.

"Companies that provide credible pathways for value creation and return of capital to shareholders over a defined period, are being sponsored by investors and rewarded in the equity market," analysts with Evercore ISI said in a Dec. 17, 2018, research note.

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Investor returns were on the decline at other major oil and natural gas companies in 2018 as it was the first time since 2015 that crude oil prices ended lower on the yearly period.

West Texas Intermediate crude oil futures lost almost 25% on the year to $45.41/bbl on the last trading day of 2018, while Brent crude oil futures dropped 21.5% over the course of 2018 to end the year at $54.91/bbl.

In tandem with the weakness in the oil futures market, Austria's OMV AG under-performed the broader oil and gas industry, with its 2018 total returns slumping 25.4% on the year despite solid income and rising production levels.

2018 returns fell by 2.4% at Royal Dutch Shell PLC, by 9.9% at Chevron Corp. and by 15.1% at Exxon Mobil Corp.

Share prices at Exxon and Chevron tanked sharply during the first half of 2018, as both companies' adjusted earnings and cash flow figures for the first two quarters of the year missed expectations and overall production numbers disappointed.

However, by the third-quarter of 2018, Exxon's earnings soared to their highest levels in four years as output, much of it from U.S. shale, increased. The major's third-quarter shale oil output from the Permian was up 57% on the year. Exxon disclosed plans in early 2018 to triple its Permian Basin oil production to 600,000 bbl/d by 2025.

Calif.-based Chevron, which represents the largest producer in the Permian based on volumes, announced in December 2018 that it was allocating $17.3 billion for its upstream business in 2019, with $7.6 billion allocated for its U.S. upstream segment. The company expects to use $10.4 billion to sustain and grow existing producing assets, with $3.6 billion set aside for the Permian and $1.6 billion earmarked for shale and other tight investments, up a sharp 60% on the year.

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As of Dec. 31, 2018, the S&P 500's year-over-year total return was a loss of 4.4%, while the S&P 500 Integrated Oil & Gas index's total return in 2018 was a loss of 13.0%.

Looking ahead, analysts believe that major capital discipline, corporate governance and pay-for-performance issues will remain key for many investors.

"Indeed, the 'pledge' for greater capital discipline and enhanced corporate governance has become the predominant investment theme in energy. Investors are differentiating between companies which employ value-based strategies and CEO pay incentives and those that do not," Evercore ISI said.