Zacks Industry Outlook Highlights: Transocean, Denbury Resources, Noble, Chesapeake Energy and Range Resources - Press Releases

For Immediate Release

Chicago, IL – April 30, 2015 – Today, Zacks Equity Research discusses the Oil & Gas, including Transocean Ltd. (RIG), Denbury Resources Inc. (DNR), Noble Corp. plc (NE), Chesapeake Energy Corp. (CHK) and Range Resources Corp. (RRC).
 
Industry: Oil & Gas        
                                 
Link: https://www.zacks.com/commentary/44599/oil-gas-industry-outlook---spring-2015
 
Crude Oil

Crude prices posted 46% annual loss in 2014; the biggest yearly fall since 2008. Such was the ferocity of the crash that last year’s three worst-performing stocks in the S&P 500 index were all energy companies -- Transocean Ltd. (RIG), Denbury Resources Inc. (DNR) and Noble Corp. plc (NE), which were down approximately 63%, 52% and 49%, respectively. The broad-based S&P 500 index gained 11.5% over the same period.

Still in stormy waters, many analysts believe that the commodity will fall further before mounting a real recovery. From about $105 per barrel last July to around $55 now -- sinking in between to a 6-year low of under $44 recently -- the plummeting value of oil represents a decline of roughly 50% over nine months.

What’s more, in the absence of major production cuts from OPEC, the effects of booming shale supplies in North America and a stagnant European economy, not much upside is expected in the commodity’s prices in the near term. Moreover, a stronger dollar has made the greenback-priced crude more expensive for investors holding foreign currency. The Iranian nuclear framework agreement, which has the potential to release more oil in the already oversupplied market, has put the final nail in the coffin.

With crude inventories at the highest level during this time of the year in 80 years at least, the commodity is very well stocked. On top of that, OPEC members (like Saudi Arabia) have made it clear time and again that they are more intent on preserving market share rather than attempting to arrest the price decline through production cuts. Therefore, the commodity is likely to maintain its low trajectory throughout 2015.

In the medium-to-long term, while global oil demand is expected to get a boost from sustained strength in China -- which continue to expand at a healthy rate despite some moderation -- this will be more than offset by sluggish growth prospects exhibited by Japan and the Western economies.

In our view, crude prices in the next few months are likely to exhibit a sideways-to-bearish trend, mostly trading in the $50-$60 per barrel range. As North American supply remains strong and demand looks underwhelming, we are likely to experience a pressure in the price of a barrel of oil.

Natural Gas

Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ -- natural gas trapped within dense sedimentary rock formations or shale formations -- has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.

With the advent of hydraulic fracturing (or "fracking") -- a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals -- shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves. As a result, once faced with a looming deficit, natural gas is now available in abundance.

While natural gas output has been setting records almost every month, the commodity’s demand has failed to keep pace with this rapid supply surge. In the past, winter weather has played a factor in boosting prices with demand for domestic natural gas exceeding available supply. But with no dearth of new supply, even this association is becoming more and more obsolete. As a result, prices continue to suffer.

Natural gas peaked at about $13.50 per million British thermal units (MMBtu) in 2008 but fell to sub-$2 level in 2012 -- the lowest in a decade. Though it has recovered somewhat, at around $2.55 now, the commodity is still way off the heights reached seven years back. Consequently, the stock prices of major U.S. natural gas producers like Chesapeake Energy Corp. (CHK) and Range Resources Corp. (RRC) remain beaten down.

What’s more, with improved drilling productivity offsetting the historic decline in rig count, and expectations of tepid heating demand with the imminent arrival of soft spring temperature, we do not expect much upside in gas prices in the near-to-medium term.

Zacks Industry Rank

Oil/Energy is one the 16 broad Zacks sectors within the Zacks Industry classification. We rank all of the more than 260 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. To learn more visit: About Zacks Industry Rank. https://www.zacks.com/stocks/industry-rank

The way to look at the complete list of 260+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #88 and lower) is positive, the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is neutral while the outlook for the bottom one-third (Zacks Industry Rank #177 and higher) is negative.

The oil/energy industry is further sub-divided into the following industries at the expanded level: Oil – U.S. Integrated, Oil and Gas Drilling, Oil – U.S. Exploration and Production, Oil/Gas Production Pipeline MLP, Oilfield Services, Oil – International Integrated, Oil – Production/Pipeline, Oilfield Machineries and Equipment, Oil–C$ Integrated, and Oil Refining and Marketing.

The ‘Oil Refining and Marketing’ is the best placed among them with its Zacks Industry Rank #18, comfortably placing it into the top 1/3rd of the 260+ industry groups, where it is joined by the ‘Oil–C$ Integrated’ and ‘Oil/Gas Production Pipeline MLP’ with respective Zacks Industry Ranks #59 and #67.

Next, the ‘Oil – International Integrated’ and the ‘Oil – Production/Pipeline’ -- both with Zacks Industry Rank #102 -- lies in the middle 1/3rd. The other industry in this space is ‘Oil – U.S. Exploration and Production,’ carrying a Zacks Industry Rank of #156.

However, all the other sub-sectors – ‘Oilfield Services,’ ‘Oil and Gas Drilling,’ ‘Oilfield Machineries and Equipment’ and ‘Oil – U.S. Integrated’ – are featuring in the bottom one-third of all Zacks industries with respective Zacks Industry Ranks of #210, #218, #220 and #238.

Looking at the exact location of these industries, one could say that the general outlook for the oil/energy space as a whole is leaning toward ‘Negative.'

Earnings Trends

A look back at the Q4 earnings season reflects that as far as overall results of the Oil/Energy sector is concerned, it can be termed as ‘weak.’ Crude prices tumbled during this period on plentiful supplies and lackluster demand. Moreover, a stronger dollar made the greenback-priced crude pricier for investors holding foreign currency.

Coming to the nascent Q1 season, for the 12.2% industry components that have come out with their numbers -- comprising 18.3% of the sector market capitalization -- earnings fell 15.9% year over year, following a 17.5% decrease witnessed in the previous quarter. Things have been equally bad on the revenue front, which was down 10.0% in the March quarter after declining 13.6% in the previous three-month period.

However, the sector has been somewhat more encouraging in terms of beat ratios (percentage of companies coming out with positive surprises). In particular, the earnings "beat ratio" was excellent at 80.0% though the revenue "beat ratio" was pretty dismal, at 20.0%.

Predictably, things are looking bleak for the full Q1 earnings season. This is not surprising, considering that oil plunged to a 6-year low (below $44 per barrel) recently on oversupply fears, dragging down estimate revisions. The Oil/Energy sector’s earnings are expected to crash 65.4% from the first quarter 2014 levels, while the top-line is likely to show a drop of 45.6%.

For the S&P 500, earnings and revenues are estimated to show year-over-year fall of just 1.3% and 5.3% during the three months ended Mar 31, 2015, respectively. This puts the Oil/Energy sector in a bad light when compared to the broader markets.

For more information about earnings for this sector and others, please read our Earnings Trends report.

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TRANSOCEAN LTD (RIG): Free Stock Analysis Report
 
DENBURY RES INC (DNR): Free Stock Analysis Report
 
NOBLE CORP PLC (NE): Free Stock Analysis Report
 
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
 
RANGE RESOURCES (RRC): Free Stock Analysis Report
 
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