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Friday, September 10, 2021

Why US Shale Companies Are So Undervalued -- David Messler -- September 10, 2021

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here

Link here.

As an example let’s compare the cash generation between Occidental Petroleum, (NYSE: OXY) and NextEra Energy, (NYSE: NEE). One company produces oil and gas primarily, and the other participates in the “Green Energy” sector building windmill farms for electricity generation.

Investors in NextEra are looking past a mountain of debt to award the company a capitalization of $168 bn at the current share price of ~$85. Some of this is understandable given the figurative, “wind at the back,” of this industry. Windfarms could be the “tulip craze” of the modern era, and are endorsed and sanctioned by local, state, and the Federal government. However, if dividend security is analyzed using conventional metrics in the table above, investors in OXY should be sleeping much better at night, than those holding shares of NEE.

At some point, investors in NEE may have to come to grips with the fact that as attractive as this sector is socially, it is not generating returns sufficient to maintain generous dividends being offered.
Devon:
Another company, Devon Energy, has already begun returning capital to shareholders in the form of an innovative dividend policy and share repurchases. Jeff Ritenour, CFO of DVN commented in their recent analyst call about capital allocation-

“I would say the share repurchases is certainly moving up the list of options for us, potential options for us as we move through the back half of this year. We could absolutely supplement it with some incremental variable dividends and potentially some incremental share repurchases. I think the other thing we'll look at as we get further into the year and probably into 2022 is the potential to increase the fixed dividend as well.”

DVN’s newly implemented dividend policy includes a modest regular dividend of $0.44 per share combined with a special dividend that constitutes a plan to return as much as 50% of excess cash to investors.

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here.   

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Sophia and Her Mom

4 comments:

  1. They're not undervalued.

    1. Article makes the classic, classic, CLASSIC mistake of conflating current prices/profits with future. The financial markets will look at the strip (downward dropping over time). And then stocks are an implicit valuation of ALL future earnings (discounted back). NOT current extrapolated forward.

    2. There's some pretty significant political risk for US oil producers. Biden has already taken actions to restrict US production while begging for more offshore production. Political risks are not meaningless. Oil companies deal with this all the time, Nigeria, etc. And the risk prices into the value.

    ReplyDelete
    Replies
    1. I'm watching the likes of Devon and Ovintiv with their promises to reward shareholders. That's why I like watching the market: a year from now we will know.

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    2. Giving capital back to shareholders (rather than growing) is probably the right move for an industry with concerns in the future. But don't be surprised when you have a lousy multiple then. You ain't a growth stock. You're tobacco.

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    3. Can't disagree. When it comes to investing, I'm in it for my heirs, not for the corporations.

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