New Strategy For E&Ps: 'Growth Be Damned'

• BMO Capital Markets believes that Q3 earnings will further illustrate the defensive shift in E&P strategy.
• The firm predicts that 2016 capex plans will show that production growth is no longer a top concern for E&Ps.
• BMO recommends investing in “defensive quality” stocks in anticipation of persistent low oil prices.

In a new report, BMO Capital Markets analyst Phillip Jungwirth takes a look at oil & gas E&Ps ahead of Q3 earnings season. Jungwirth explains how the financial strategy of E&Ps has changed throughout the year, gives his predictions for what E&P investors should be expecting and names BMO’s top stock picks in the space.

The game has changed
According to Jungwirth, the one constant that investors can expect from E&P companies throughout market cycles is that they always change their behavior in response to changes in oil prices. This year, most E&Ps have gone from attempting to maintain production growth to preserving liquidity as the low oil price environment has dragged on.

Looking ahead
Jungwirth believes that Q3 earnings for most E&Ps is much less about the top and bottom lines for each individual company and more about each company's positioning and strategy for tackling a 2016 that promises more low oil prices.

“Our conversation with many management teams in the past several weeks tells us that spending closer to cash flow will be the game plan presented by most companies, growth be damned,” Jungwirth explains.

Based on this assumption, BMO is projecting that E&P capex will decline by about 24 percent in 2016 following a 34 percent decline in 2015.

Top picks
As E&Ps continue to shift toward a defensive strategy, Jungwirth advises that investors do the same in choosing “defensive quality” stocks. BMO’s top picks include Anadarko Petroleum Corp AOC, Concho Resources Inc CXO, EOG Resources Inc EOG, Newfield Exploration Co. NFX, Occidental Petroleum Corp OXY, PDC Energy Inc PDCE and Cimarex Energy Co XEC.

Disclosure: the author holds no position in the stocks mentioned.