The oil rally may well be over as U.S. drillers have increasingly been gathering on oil patches in recent weeks. This is likely to undo OPEC’s efforts to restore and even raise crude prices that fell to record lows last year.
The timing could not have been worse as U.S. banks too are set to reassess credit lines next month. During the reassessment period, the banks could consider the prospects of U.S exploration and production (E&P) players, which have been badly hit by the recent oil price weakness. Banks might pull the trigger for lowering credit lines for E&P companies.
However, offloading E&P stocks might not be wise as the industry outperformed the S&P 500 Index during January-October 2016, when the borrowing bases for the firms decreased drastically.
Crude Below $50 a Barrel
West Texas Intermediate (WTI) crude is once again trading below the physiological mark of $50 per barrel. In fact, the commodity recently slipped to $47.01 per barrel – the lowest level since Nov 30, 2016. This is primarily due to the faster-than-expected increase in the U.S. inventory.
Also, the rig count report issued by Baker Hughes Inc. BHI clearly shows that U.S drillers are gathering on the oil patches to increase production. It is well documented that supply glut was the main reason for the plunge in the commodity’s price earlier and the current state of affairs hint at history repeating itself.
OPEC’s initiative to recover crude by cutting production seems to have failed. The oil cartel maintained its side of the bargain and lowered output as per the deal announced last November. In fact, oil jumped above $50 immediately after the OPEC deal on Nov 30, and continued to advance up to the beginning of March this year.
However, U.S. drillers are taking advantage of the higher oil prices at the expense of OPEC and are pumping oil out of the ground, creating a downward pressure on the commodity. Several analysts are of the opinion that this might well be the beginning of a new phase of troubles for the beleaguered sector that only just started to recover.
Banks Could Reduce U.S. E&P’s Credit Line
Adding to the woes of U.S. E&P players, the next round of credit line reassessment by banks is scheduled to commence next month.
No doubt, the timing is bad as the business environment is unfavorable for E&P companies owing to weak crude. This could prompt the banks to lower the line of credit for these energy firms. Kraig Grahmann, a partner in the Energy Practice Group of law firm Haynes & Boone LLP, said “A drop below $45 would likely spur credit-line reductions, raising the specter of cuts that crippled drillers a year ago.”
The decision of the banks to reduce credit lines could hinder growth of many U.S. E&P companies. The news is really ill-fated for the firms, especially when the players have showed their intention to grow capital spending during 2017. Energy major EOG Resources Inc. EOG decided to increase its 2017 capital spending by almost 44%, while Continental Resources Inc. CLR announced an increase in its budget by 68%.
Why Investors Need Not Worry
The news should have compelled investors to pull their money out of the E&P stocks belonging to the Oil & Gas-U.S Exploration & Production industry. But a deeper analysis shows that there is really nothing to worry about (yet).
Last year, the borrowing base for E&P companies in the U.S. slipped 16% over the January–October period, following bank reassessment, according to Bloomberg. During that span, specifically during February, oil hit multi-year lows that also led major indexes plummet to record levels. Nonetheless, the performance of the Oil & Gas-U.S Exploration & Production industry was much better than the S&P 500. We note that during the aforesaid period the industry gained 25% compared with just 4% improvement to S&P 500.
Also, the industry with a rank of #56 is among the top 22% of industries. Investors should know that that the top 50% of the Zacks Ranked industries is likely to outperform the bottom 50% by a factor of more than two to one. For more information please refer to our Zacks Industry Rank.
Key Picks from the Industry
Going by the abovementioned factors, stocks belonging to the Oil & Gas-U.S Exploration & Productionshould be written off. However, it is difficult to pick the stocks with the best prospects. This is where our proprietary model comes in handy. We have selected U.S E&P companies with either a Zacks Rank #1 (Strong Buy) or 2 (Buy). The stocks also witnessed upward earnings estimate revisions for 2017.
Antero Resources Corporation(AR) – headquartered in Denver, CO – is involved in activities like exploration and production of oil and natural gas resources in the U.S.
The Zacks Rank #1 company beat estimates in all the trailing four quarters with an average positive earnings surprise of 239.10%. Moreover, the Zacks Consensus Estimate for the company’s bottom line for 2017 has been revised from a loss of 8 cents to a profit of 14 cents over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Pioneer Natural Resources Company PXD – headquartered in Irving, TX – exploits for oil and gas resources in the U.S. The company sports a Zacks Rank #1.
The company posted better-than-expected earnings in three of the last four quarters with an average earnings beat of 21.86%. The Zacks Consensus Estimate for 2017 has been revised upward from earnings of $1.95 per share to $2.04 over the last 30 days.
Based in San Antonio, TX, Abraxas Petroleum Corporation AXAS is involved in exploitation and production activities in the U.S. The stock presently carries a Zacks Rank #2.
Over the last 30 days, the Zacks Consensus Estimate for 2017 earnings has been revised from 12 cents to 14 cents.
Sanchez Energy Corporation SN – headquartered in Houston, TX – is engaged in the acquisition and development of U.S. onshore unconventional oil and natural gas resources. The Zacks Rank #2 company saw the Zacks Consensus Estimate for 2017 earnings per share being revised to 59 cents from 40 cents.
Headquartered in Houston, TX, W&T Offshore Inc. WTI exploits for oil and gas properties in the Gulf of Mexico.
The company, which carries a Zacks Rank #2, beat the Zacks Consensus Estimate in all the last four quarters with an average positive earnings surprise of 50.53%. Moreover, the Zacks Consensus Estimate for W&T Offshore’s earnings has been revised from a loss of 39 cents to a profit of 61 cents over the last 30 days.
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Baker Hughes Incorporated (BHI): Free Stock Analysis Report
Pioneer Natural Resources Company (PXD): Free Stock Analysis Report
EOG Resources, Inc. (EOG): Free Stock Analysis Report
W&T Offshore, Inc. (WTI): Free Stock Analysis Report
Abraxas Petroleum Corporation (AXAS): Free Stock Analysis Report
Sanchez Energy Corporation (SN): Free Stock Analysis Report
Continental Resources, Inc. (CLR): Free Stock Analysis Report
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