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Oil & Gas US E&P Industry Rebounding Off Coronavirus Lows

Nilanjan Choudhury
·7 min read

The Zacks Oil and Gas - US E&P industry consists of companies based in the United States focused on exploration and production (E&P) of oil and natural gas. These firms are engaged in finding hydrocarbon reservoirs, drilling oil and gas wells, and producing and selling these materials to be refined later into products such as gasoline.

Let’s take a look at the industry’s three major themes:

•    Oil has clawed back some of the ground lost in a sharp selloff associated with the coronavirus-induced demand destruction for the fuel. WTI is now on an upswing, with the U.S. benchmark recently breaching $30 a barrel. Meanwhile, the contract’s futures curve has moved into backwardation – an indication of a tighter market as easing lockdown measures improve the demand outlook amid massive production cuts by the OPEC+ group. Adding to the supply reductions, top U.S. producers, including Pioneer Natural Resources Company (PXD), EOG Resources (EOG), Diamondback Energy (FANG), Devon Energy (DVN), Concho Resources (CXO) and Apache (APA), have all slashed production.

•    Of late, natural gas has been gently rising from just over $1.5 per MMBtu at the start of April to nearly $2 now on prospects of lower volumes. As the oil industry reacts to sharply falling prices by rushing to scale back output, expectations are high that a cut in crude production will also limit associated gas output, thereby reducing the massive supply glut. Operators in oil-dominated shale basins like the Permian, Eagle Ford and North Dakota have long struggled with significant natural gas flaring - a largely unwanted derivative that emerges alongside crude production in these regions.

•    Over the past few years, energy producers worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers. Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs, while the ongoing collapse in crude has forced them to adopt a more disciplined approach to spending capital. While these actions might decrease short-term production, the steps are expected to preserve cash flow, support balance sheet strength and help the companies emerge stronger toward the second half of the year.

Zacks Industry Rank Acknowledges Improving Outlook

The Zacks Oil and Gas - US E&P is a 60-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #48, which places it in the top 19% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Taking into consideration the positive near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags Sector & S&P 500

The Zacks Oil and Gas - US E&P industry has lagged the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 55.7% over this period compared to the S&P 500’s gain of 5% and broader sector’s decrease of 38%.

One-Year Price Performance

Industry’s Current Valuation 

Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of noncash expenses.

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 4.41X, significantly lower than the S&P 500’s 10.91X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 3.82X.

Over the past five years, the industry has traded as high as 15.93X, as low as 3.02X, with a median of 6.60X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

Bottom Line

It seems that crude’s worst losses are in the rear view mirror with signs of gradual rebalancing. While the OPEC+ group has started to withhold output by almost 10 million barrels per day – the largest in history – from May 1, U.S. shale oil production is set to tumble in 2020 on reduced capital availability. Finally, greater financial discipline practiced by the energy companies has raised expectations that supply growth could slow down sooner than later even as fuel demand picks up on easing lockdown measures.

Natural gas, on the other hand, is also expected to experience a significant supply drop, largely as a result of decrease in production associated with the lower number of oil wells drilled in response to price crash.

With the abovementioned catalysts set to provide near-term upside, we are presenting a stock with a Zacks Rank #1 (Strong Buy) and three stocks with a Zacks Rank #2 (Buy) that are well positioned to gain.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Cabot Oil & Gas Corporation (COG): Cabot focuses on high-impact natural gas-focused drilling in the Marcellus Shale. Over 30 days, the Houston, TX-headquartered company - carrying a Zacks Rank #1 - has seen the Zacks Consensus Estimate for 2020 increase 16.1%.

Price and Consensus: COG

Noble Energy, Inc. (NBL): Houston, TX-based Noble Energy has oil and gas operations in four core areas — the Denver/Julesburg (DJ) Basin in onshore United States, Delaware Basin, Eagle Ford Shale and Eastern Mediterranean. The company carries a Zacks Rank #2 and has surpassed estimates in each of the last four quarters, the average being 144.2%.

Price and Consensus: NBL

Gulfport Energy Corporation (GPOR): A predominantly natural gas player, Gulfport Energy’s asset base is concentrated in the Utica Shale of Ohio and the SCOOP play in Oklahoma. Over 30 days, the Oklahoma City, OK-headquartered company - carrying a Zacks Rank #2 - has seen the Zacks Consensus Estimate for 2020 increase 42.6%.

Price and Consensus: GPOR

EQT Corporation (EQT): EQT is primarily an explorer and producer of natural gas, with major focus on the Appalachian Basin in Ohio, Pennsylvania and West Virginia. Over 30 days, the Pittsburgh, PA-headquartered company - with a Zacks Rank #2 - has seen the Zacks Consensus Estimate for 2020 increase 29.9%.

Price and Consensus: EQT

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Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
Noble Energy Inc. (NBL) : Free Stock Analysis Report
Gulfport Energy Corporation (GPOR) : Free Stock Analysis Report
Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
EQT Corporation (EQT) : Free Stock Analysis Report
EOG Resources, Inc. (EOG) : Free Stock Analysis Report
Devon Energy Corporation (DVN) : Free Stock Analysis Report
Concho Resources Inc. (CXO) : Free Stock Analysis Report
Cabot Oil Gas Corporation (COG) : Free Stock Analysis Report
Apache Corporation (APA) : Free Stock Analysis Report
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