The oil and gas sector has been through several ups and downs in 2018. While oil prices rallied to multi-year highs from a decent start this year, natural gas prices picked up pace during the second half of 2018. However, the surge in oil prices was short-lived. Natural gas, on the other hand, currently stands at a significantly higher level than its starting point. The movement in prices and the current geopolitical scenario have given investors an idea regarding the future of hydrocarbons. To get a better hold of the future and idea about how to invest in the oil and gas sector, one needs to understand the developments in the space this year.
Oil and Gas Prices in 2018
Struggling Oil: WTI crude, the American benchmark, started the year just above $60 per barrel of oil and climbed to a multi-year high of $76.41 on Oct 3, primarily due to U.S. sanctions on Iran. The drastic fall in Iranian crude exports prior to the sanctions helped to drive oil prices higher. However, several factors including waivers to some heavy oil-importing countries, existing oil supply glut and fears that an economic slowdown will dampen the demand outlook led to a sharp fall in oil prices. The OPEC-led output cut also failed to boost investor sentiment and crude price. Currently, WTI is trading below the $50 per barrel mark.
Strength in Natural Gas: Natural gas price traded below $3 per million British thermal units (MMBtu) at the start of the year, which jumped above $4.80 per MMBtu in November. The rise in price level can be attributed to several factors like increasing demand in winter for room heating purposes, replacing coal as the top choice for electricity generation in the United States, rising need for cleaner energy resources, low U.S. gas stockpiles, nuclear power plant outages and others. Currently, the Henry Hub natural gas spot price stands at $3.80 per MMBtu.
It is to be noted that the oil sector has underperformed the S&P 500 composite so far this year. The S&P 500 saw a decline of 4.5% year to date compared with the oil and gas sector’s collective fall of 16.7%.
What Lies Ahead?
The supply glut in the oil market is not expected to go any time soon, as a surge in demand in the near future is not prominent. Moreover, the waivers on Iran oil sanctions are likely to continue till April. Per International Energy Agency (IEA), global surplus in the fourth quarter will touch 0.7 million barrels per day (MMBbls/d). Moreover, the surplus could rise to 2 MMBbls/d in the first half of 2019, IEA added. The bearish global demand outlook further dampens investor sentiment. Hence, an immediate rise in crude prices is not on the horizon.
Meanwhile, natural gas production is expected to continue increasing in the coming days, per Energy Information Administration (EIA). The agency anticipates output to increase 11% this year to record levels. This will likely lead to lower natural gas prices. Per EIA, Henry Hub natural gas spot price in 2019 is expected to average $2.98 per MMBtu, lower than current year’s expected average of $3.01 per MMBtu.
In short, the oil and gas sector is up for a bloodbath. Now let’s focus on some oil and gas stocks, which can make investors cheerful even in the current volatile market pricing scenario.
Stocks That Can Outperform the Sector
Here we have highlighted a few stocks that are poised to outperform the oil and gas sector in 2019. These companies have a market capitalization of more than $1 billion, making them large enough to stay strong even in the face of unfavorable events. Moreover, these stocks either have a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Additionally, the chosen ones have a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum, and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
We have listed below five hot stocks for you:
Archrock, Inc. AROC is an oil and gas equipment and services provider. While its bottom line is expected to surge more than 250% year over year in 2018, the same is anticipated to increase more than 48% in 2019. It is to be noted that the Houston, TX-based company delivered average positive earnings surprise of 33.3% in the last four reported quarters. It has a Zacks Rank #2 and a VGM Score of A.
Cabot Oil & Gas Corporation COG is an independent oil and gas exploration company with producing properties mainly in the continental U.S. Cabot focuses on high-impact natural gas-focused drilling in the Marcellus Shale. The Houston, TX-based company continues to improve its industry-leading cost structure. Notably, its bottom line for 2018 is expected to surge more than 118% year over year and 63% in 2019. It currently has a Zacks Rank #1 and a VGM Score of B.
QEP Resources, Inc. QEP is a leading independent energy company engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. The Denver, CO-based company’s operations are currently focused on the Northern Region (primarily in North Dakota and Utah) and the Southern Region (primarily Texas and Louisiana) of the United States. Its bottom line for 2019 is expected to surge more than 600% year over year. The company’s earnings surpassed the Zacks Consensus Estimate thrice in the last four quarters. It currently has a Zacks Rank #2 and a VGM Score of A.
YPF Sociedad Anonima YPF is an integrated oil and gas company headquartered in Buenos Aires, Argentina. It has strong upstream and downstream activities in the country. The company’s earnings for 2018 are expected to surge more than 27%. Moreover, its earnings estimates for 2019 have been revised upward to $1.56 per share from $1.08 in the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate thrice in the last four quarters. It currently has a Zacks Rank #2 and a VGM Score of A.
TC PipeLines, LP TCP is a master limited partnership (MLP), with interests in eight pipeline systems. The Houston, TX-based partnership’s earnings for 2018 are expected to surge more than 28%. Moreover, its earnings estimates for 2019 have been revised upward to $3.36 per share from $2.99 in the past 60 days. The company’s earnings beat the Zacks Consensus Estimate thrice in the last four quarters. It currently has a Zacks Rank #2 and a VGM Score of B.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>
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TC PipeLines, LP (TCP) : Free Stock Analysis Report
Archrock, Inc. (AROC) : Free Stock Analysis Report
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