Gabriele Sorbara, Managing Director & Senior Equity Analyst, Siebert Williams Shank & Co.
In this extensive 3,319 word interview, exclusive to the Wall Street Transcript, Gabriele Sobrara details his top picks among oil and gas production companies and recommends many dividend leaders for investors.
Gabriele Sorbara is a Managing Director & Senior Equity Analyst at Siebert Williams Shank & Co., LLC.
Mr. Sorbara has more than 15 years of research experience covering the oil and gas E&P sector.
He joined The Williams Capital Group in July 2016, which merged with Siebert Cisneros Shank in November 2019, creating Siebert Williams Shank & Co. LLC (SWS).
Prior to joining the firm, he covered the E&P sector at Topeka Capital Markets, Imperial Capital LLC and Caris & Company, as well as over six years at KeyBanc Capital Markets. He received his Bachelor of Business Administration from Hofstra University.
The current situation for the potential dividend leaders has its origins in environmental protections and the last oil and gas production downturn.
“Lenders haven’t been lending money to the fossil fuel companies like they were in the heyday.
Many banks have put restrictions in place to achieve a more ESG-friendly rating. But E&Ps do not need to borrow like they once did.
The balance sheets of these key companies are completely different than they were two to three years ago.
Again, leverage is superbly low. A lot of them are approaching net zero debt and will go into net negative at current commodity price levels.
They are returning massive amounts of cash back to shareholders.
When I look at total capital returns for many of the companies on my list — I cover a lot of the higher-quality names — you are seeing many double-digit capital return profiles.
So what I mean is, dividends plus buybacks divided by enterprise value, with some of these companies reaching 10%, 12% for best-in-class type returns compared to the broader market.
Obviously, these companies are cyclical and they are depleting assets.
So they have to be acquisitive down the road, find new resource plays, and we’ve seen a lot less work being done on the exploration side.
For international projects, which we haven’t talked about, the lead time is years. So those big projects that the majors are doing, those take multiple years before you get that first production…
Over the past month, WTI oil prices have increased over 20%, so E&P margins should continue to improve and translate into higher estimates and stock prices.
Investors will chase oil companies because they are best-known for a hedge against inflation.
While the E&Ps have underperformed oil prices, the fundamentals for the E&P sector are very strong. When the dislocation in the market smooths out, I think people will jump into the E&P sector first and you will see catch-up and outperformance from this group supported by the higher commodity prices.
The sector should gain some strength and stability as the long-only investors increase exposure to the sector.”
Dividend leaders are the sweet spot for oil and gas production investors.
“Investors’ sentiment has been pretty low; I mean again it’s really the hedge funds trafficking in the sector and you can see it with the volatility around earnings periods.
And it’s just on that regulatory side that’s shifting banks away from the sector.
It’s the public demanding certain things on the ESG front. It’s the banks taking on these ESG efforts and that’s really creating the negative sentiment around E&Ps.
I think when people really dig into E&Ps and if they understood oil and gas, they would understand that E&Ps actually do the right thing.
They have reduced GHG and methane intensity; the larger E&Ps are very responsible producers.
A lot are talking about certified responsibly sourced natural gas, responsibly sourced oil.
When you look at some of these renewable companies, people just don’t understand the amount of resources that are required to build a lot of these technologies and facilities that have a life of maybe 20 years and then end up in a landfill somewhere.
For example, these are heavily dependent on rare earths mined and processed in environmentally harmful ways in China.
And these are critical to build expensive electric cars that run on electricity powered by coal and natural gas. Not to mention the challenges in the recycling of the lithium batteries today.
While there are a lot of things going on that people don’t understand or just choose to ignore, I feel like they are starting to get a grasp of it slowly and we are beginning to see a re-rating and a relative rotation to traditional energy companies.
But long-only investors have not made a full turn yet.
The weighting of the S&P is just very low. If you look back 15 years ago when I started, the benchmark weighting to energy in the S&P 500 was at 16% and we are at 3.50% today. So there is a lot of room here to make money and for money to rotate into the sector.
And again, as more of these energy shocks occur around the world, people will realize the value of fossil fuels and how they are reliable and efficient and how they can be produced in a responsible manner.
The energy transition will slowly occur over the next few decades and fossil fuels will be integral to the transition…
Oil and natural gas make the world go round. These products are very important in everyday life. It’s just underappreciated and hated for the wrong reasons.
E&Ps are doing a better job checking off the ESG metrics than they have historically and they aren’t getting credit for it.”
Some of the top dividend leaders are large cap oil and gas producers.
“I think the way you value a company is on free cash flow and the amount of return to shareholders and these are some of the best returns that you see in the entire S&P with dividend yields 8%, 9%, 10% for some companies. I have a dividend yield on Coterra Energy (NYSE:CTRA), 9.8% for 2022; Devon Energy (NYSE:DVN), 6.9% in 2022; Diamondback Energy (NASDAQ:FANG), 5.2%; EOG Resources (NYSE:EOG), 6.4%. And these companies still will have a lot of cash remaining to put on the balance sheet and they can use that for exploration, M&A, or to further reduce debt, but these leverage metrics are approaching zero net debt for many.”
Get all the details on these dividend leaders and many other oil and gas production company stock recommendations from Gabriele Sobrara by reading the entire 3,319 word interview, exclusive to the Wall Street Transcript.
Gabriele Sorbara, Managing Director & Senior Equity Analyst
Siebert Williams Shank & Co., LLC
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