The energy space is currently performing a lot better than expected. While pundits predicted that the supply glut of 2018 and sluggish demand outlook for 2019 are likely to keep pressurizing oil and gas prices at least for the first half of the year, as a matter of fact, the prices are moving in favor of the producers. The primary reasons behind the same are OPEC+ production cuts,
Venezuelan sanctions and crisis, political tension in Libya, and resilient demand. The first quarter of the year is already over and the WTI is strengthening against all odds. The American benchmark got off to a strong start this year, up 37% from $46.31 to $63.46 per barrel level at present.
Meanwhile, natural gas prices are struggling to break above the $3 per MMBtu mark, with the onset of the injection season and continually growing production. The fundamentals of natural gas consumption continue to befavorableowing to its growing demand by electrical utilities, booming exports to Mexico, large-scale liquefied gas export facilities and higher usage from industrial projects.
However, record high production in the United States and expectations for explosive growth through 2020 implies that the supply will keep pace with demand. Therefore, prices are likely to trade sideways but for weather-driven movements.
Amid the contradictory fortunes of oil and natural gas, it seems like a good time to perform a comparative analysis between two exploration and production companies, namely EQT Corp. EQT and Cimarex Energy Co. XEC. While EQT Corp is a gas-focused company, Cimarex Energy possesses an oil-heavy portfolio. Both the companies are focused on production in the United States and their individual market capitalization is a little more than $5 billion.
Let’s delve deeper into the companies’ fundamentals to analyse which stock is better right now.
Balance Sheet Strength
To understand balance sheet strength, we considered long-term debt to capital for both the companies against the industry average in the backdrop. While long-term debt to capitalization of EQT Corp is 30.4%, the same for Cimarex Energy stands at 30.9%. Both the figures are significantly lower than the industry average of 43.5%. EQT Corp marginally beats Cimarex Energy in this context.
EQT Corp’s lack of geographic diversification is concerning, since its entire asset base is located in the Appalachian Basin. As such, it is more vulnerable to basin-specific delays and interruptions in production from wells, which can potentially hamper growth.
Conversely, Cimarex Energy’s operations are located in Oklahoma, Texas and New Mexico. Its exploration and production activities primarily take place in two areas: the Permian Basin and the Mid-Continent region. Both these prolific regions are famous for cheap production costs. Hence, Cimarex Energy clearly wins the geographic diversification round.
EQT Corp focuses on natural gas supply activities in the Appalachian area. In 2018, the company’s total production was 1,487, of which 6.8% comprised only liquids. In comparison, Cimarex Energy's daily production volumes totalled 221,946 Boe/d, of which 57.7% was liquids. This positions the company to gain tremendous profit from the improving oil prices. Hence, EQT Corp is missing out on a huge opportunity of making money from the rising oil prices.
Earnings History and Bottom-Line Prospects
Considering a comprehensive earnings history, EQT Corp surpassed estimates in all the prior four quarters, with average earnings surprise of 6.3%. In comparison, Cimarex Energy outpaced estimates in three of the trailing four quarters, with average earnings surprise of 12%.
EQT Corp has seen two positive estimate revisions in the past few weeks and its Zacks Consensus Estimate for 2019 has been upwardly revised from $1.35 per share to $1.38. Cimarex Energy, on the contrary, has seen four positive estimate revisions during this period and its Zacks Consensus Estimate for the current year has also moved upward from $5.70 per share to $5.75.
Although we can say that EQT Corp has a good earnings history and bright prospects for 2019, Cimarex Energy’s numbers are way better.
Price Performance and Future Prediction
The comparison will be incomplete without a short-run price performance evaluation. In the past three months, EQT Corp jumped 8.2% while Cimarex Energy increased 0.1%. The collective industry, however, declined 3% in the said period as shown below.
The price movement is expected to change in the coming days. In terms of EV/EBITDA ratio — which is one of the best multiples for valuing oil and gas-related companies because energy firms have a large amount of debt and EV (Enterprise Value) including debt for valuing company or industry – Cimarex Energy seems undervalued compared with EQT Corp.
Cimarex Energy currently has a trailing 12-month EV/EBITDA ratio of 4.95, which is below EQT Corp’s 5.24. Hence, Cimarex Energy stocks have considerable room to improve in the near future.
Our comparative analysis shows that Cimarex Energy holds an edge over EQT Corp in terms of bottom-line prospects, geographical diversification, production mix, and a detailed earnings history and future possibilities. However, EQT Corp marginally beats Cimarex Energy in consideration of balance sheet strength and past three months’ price performance. Overall, Cimarex Energy’s favorable oil-heavy portfolio amid rising prices of the commodity tilts the balance in its favor.
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