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The upstream energy sector in the United States is looking forward to better days ahead as oil demand recovery, thanks to multiple vaccine rollouts, is expected to be sustainable. This marks the perfect time for betting on exploration and production companies. Furthermore, choosing the resilient ones with low or manageable debt exposure, which will provide companies with immunity to navigate through volatile times, is considered prudent.
Let’s delve deeper into the factors driving this industry.
Crude Price Recovery
Owing to coronavirus-induced demand destruction, WTI crude prices plunged to historical lows last year (negative at one point) but witnessed tremendous recovery by year-end. WTI is now on an upswing, with the U.S. benchmark lingering above $66 a barrel. The easing of lockdown measures has improved the demand outlook amid successful production cut compliance by OPEC+ group members.
Natural Gas Price to Soar
Natural gas prices have been gently rising over the last few quarters. Increasing liquefied natural gas (LNG) exports and domestic demand will likely drive the prices. Demand for the commodity is likely to rise in commercial, industrial and residential places. The U.S. Energy Information Administration anticipates the Henry Hub spot price to average $3.05 per million British thermal units (MMBtu) in 2021, indicating a significant increase from the 2020 average of $2.03.
Higher commodity prices will boost the bottom line of oil and gas companies like ConocoPhillips COP, EOG Resources, Inc. EOG, and others. The stability in prices will likely help them further strengthen their financial situation.
Over the past few years, oil and gas producers have been working tirelessly toward cost reduction, while boosting output. Improving drilling techniques triggered operational efficiencies, enabling the upstream players to decrease unit costs. The COVID-19 pandemic further forced them to adopt a more disciplined capital spending approach. This has likely resulted in better preserving cash flow and a stronger balance sheet.
As the upstream industry is witnessing a market recovery, investors can tap into the profits with smart investment in stocks with strong operations and balance sheet. Companies with a resilient balance sheet can muscle through any market weakness. We have selected three such companies with low or manageable debt exposure, which provides them ample financial flexibility. These companies hold a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Companies to Focus on
Headquartered in Denver, CO, PDC Energy, Inc. PDCE is focused on the Wattenberg Field in Colorado and Delaware Basin in Texas. The company’s long-term debt at first quarter-end was $1.2 billion, with debt to capitalization of 32.4%. Moreover, it had $1.4 billion in total liquidity, while its credit facility currently has a total borrowing base of $1.6 billion. Moreover, PDC Energy’s debt maturity profile is a favorable one, with $200-million convertible notes being the only near-term due in September 2021. This Zacks #1 company’s bottom line is expected to jump 120.7% year over year in 2021.
Earthstone Energy, Inc. ESTE — based on The Woodlands, TX — has a strong upstream portfolio, with assets in the prolific Midland Basin and Eagle Ford. At first quarter-end, the company had $223.4 million in long-term debt and a total liquidity of around $138 million. It had a debt to capitalization of 20.2%. This Zacks Rank #2 company is expected to witness an 87.7% year-over-year surge in sales figure in 2021. Moreover, it has seen two upward earnings estimate revisions in the past 30 days compared with none in the opposite direction. Importantly, it beat earnings estimates thrice in the last four quarters, with an average surprise of 103.8%.
Headquartered in Oklahoma City, OK, PHX Minerals Inc. PHX is a natural gas and oil mineral company. Total production for the March quarter amounted to 2,297 million cubic feet equivalent. As of Mar 31, 2021, it had 64,206 million cubic feet of natural gas equivalent of total proved reserves. Importantly, it had only $23.5 million long-term debt, with a debt to capitalization of 27.6%. The Zacks Rank #2 company’s bottom line is expected to rise 40% year over year in 2021. Markedly, the firm has an average earnings surprise of 320% in the last four quarters.
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ConocoPhillips (COP) : Free Stock Analysis Report
EOG Resources, Inc. (EOG) : Free Stock Analysis Report
PDC Energy, Inc. (PDCE) : Free Stock Analysis Report
Earthstone Energy, Inc. (ESTE) : Free Stock Analysis Report
PHX Minerals Inc. (PHX) : Free Stock Analysis Report
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