Oil pump jacks in Cushing, Okla.

Photograph by JOHANNES EISELE/AFP via Getty Images

Oil and gas executives have now clearly gotten the message — investors want them to become more efficient, not grow. And they want the companies to return more cash to shareholders through dividends and share repurchases.

The industry’s embrace of those strategies, and a steady increase in oil prices, has led the S&P 500 Energy sector to rise 42% this year after falling 37% in 2020. Energy stocks now trade at an average price to earnings ratio of 17.5 times on their expected earnings over the next 12 months, versus 22.2 times for the S&P 500.

Additional gains are still possible, but catalysts will be harder to come by now. Barclays analyst Jeanine Wai thinks that a major driver in the coming months will be announcements of new dividends or dividend policies. She also thinks that stocks that are more dependent 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 issued a special $1 dividend last month, but Wai writes that some investors “are skeptical, so there’s room for incremental buyers.” EOG has a relatively low dividend yield for a large oil firm — the stock’s dividend yield is 1.9%.

Ovintiv also looks more likely to return more cash to shareholders, Wai predicts. She thinks “incremental cash payout is a catalyst,” noting that Ovintiv “has top tier free cash flow yield, and is no longer lagging on de-levering.” Ovintiv stock has roughly doubled since the start of the year, but she thinks it could have more room to rise. And the dividend yield is a relatively paltry 1.2%, meaning it has room to rise.

Wai also likes Occidental Petroleum (OXY), which some other investors have steered clear of because of its high debt load following its acquisition of Anadarko Petroleum. Wai likes Occidental because it is sensitive to oil prices and could do well as the commodity rises.

Wai upgraded EOG, Ovintiv and Occidental to Buy. Her favorite name, however, is ConocoPhillips (COP), which she thinks still gets too little love from Wall Street.

She downgraded some other stocks, however. She dropped her rating on Continental Resources (CLR), for instance, to Underweight, because of the stock’s outperformance this year — it has more than doubled. She also downgraded APA (APA) and Cimarex Energy (XEC) to Equal Weight from Overweight.

Write to avi.salzman@barrons.com

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