Dividends are the next oil catalyst. Here are the actions that could benefit from it.



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Oil pump jacks in Cushing, Okla.

Photograph by JOHANNES EISELE / AFP via Getty Images

Executives in the oil and gas industry now have a clear message: investors want them to become more efficient, not to grow. And they want companies to return more money to shareholders through dividends and share buybacks.

Industry adoption of these strategies and a steady rise in oil prices have led the S&P 500’s energy sector to rise 42% this year after falling 37% in 2020. Stocks of the S&P 500 Energy are now trading at an average price-to-earnings ratio of 17.5 times their expected earnings over the next 12 months, compared to 22.2 times for the S&P 500.

Further gains are still possible, but catalysts will now be more difficult to find. Barclays analyst Jeanine Wai believes a major driver in the coming months will be the announcement of new dividends or new dividend policies. She also believes stocks more reliant on high oil prices could outperform.

Among the stocks that could announce new dividends are

EOG Resources

(ticker: EOG) and

Ovintiv

(OVV), Wai predicts. EOG already paid a special dividend of $ 1 last month, but Wai writes that some investors “are skeptical, so there is room for additional buyers.” EOG has a relatively low dividend yield for a large oil company – the stock’s dividend yield is 1.9%.

Ovintiv

Also seems more likely to make more money for shareholders, Wai predicts. She believes “the extra cash payments are a catalyst,” noting that Ovintiv “has a leading free cash return and is no longer behind on deleveraging.” Ovintiv’s stock has roughly doubled since the start of the year, but she believes it may have more room for improvement. And the dividend yield is a relatively paltry 1.2%, which means there is room to increase.

Wai also likes

Western Oil

(OXY), which other investors have avoided due to its high leverage following its acquisition of Anadarko Petroleum. Wai likes the Westerner because he is sensitive to oil prices and may do well as commodity rises.

Wai upgraded EOG, Ovintiv, and Occidental to buy. Her preferred name, however, is

ConocoPhillips

(COP), which she says still receives too little love from Wall Street.

However, it has downgraded other actions. She lowered her rating on

Continental resources

(CLR), for example, to Underweight, due to the stock’s outperformance this year – it has more than doubled. She also downgraded

APA

(APA) and

Cimarex Energy

(XEC) to the equal weight of overweight.

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