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Zacks Industry Outlook Highlights: Pioneer Natural Resources, Devon Energy, Diamondback Energy, Apache Corp and PDC Energy

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Zacks Equity Research
·10 min read
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For Immediate Release

Chicago, IL – February 9, 2021 – Today, Zacks Equity Research discusses Oil & Gas - U.S. E&P, including Pioneer Natural Resources Company PXD, Devon Energy Corporation DVN, Diamondback Energy, Inc. FANG, Apache Corporation APA and PDC Energy, Inc. PDCE.

Link: https://www.zacks.com/commentary/1258962/us-upstream-industry-on-the-path-to-recovery-5-stocks-to-buy

As we start the year 2021, there is an increasing sense that the worst is behind the Zacks Oil and Gas - Exploration and Production - United States industry. In particular, oil is showing promising signs with prices recently hitting levels last seen in January 2020.

The improvement in commodity realizations is expected to increase returns for exploration and production (E&P) or upstream firms like Pioneer Natural ResourcesDevon EnergyDiamondback EnergyApache Corp and PDC Energy.

About the Industry

The Zacks Oil and Gas - US E&P industry consists of companies based in the United States focused on 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, fuel oil, distillate etc.

3 Key Investing Trends to Watch in the Oil and Gas - US E&P Industry

Recovery in Commodity Prices: The price of WTI crude — the U.S. benchmark — has come a long way since the depths of minus $38 a barrel in April. Currently at a one-year high of nearly $57, the oil market is expected to tighten throughout 2021, supported by the OPEC+ cuts and an earlier-than-expected pickup in the commodity’s demand on the back of vaccine rollouts.

Meanwhile, natural gas — up 16% in 2020 for its biggest annual gain in four years — briefly broke the $3 threshold recently due to strong liquefied natural gas (“LNG”) feedgas deliveries and bullish changes toward a chiller outlook throughout this month, which translates into larger draws due to increased use of heaters. The oil and gas price gains will greatly benefit the results of E&P companies for obvious reasons.

Air Travel to Remain Suppressed: Given the tough border controls and stalled demand, commercial passenger flights remain curtailed. In particular, the usage of distillates such as aviation fuel continues to be weak with air travel weighed down by the virus-related restrictions. As long as the coronavirus outbreak continues, there will be pressure on the demand side of the equation.

Per the International Energy Agency, crude consumption fell by an astounding 8.8 million barrels per day year over year in 2020. Evidently, the recovery in oil consumption is being impacted by localized lockdowns and containment measures to tackle the still-prevalent COVID-19 cases.

Continued Focus on Cost Control: The energy companies have changed their approach to spending capital. Over the past few years, 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 coronavirus-induced collapse in crude has forced them to adopt a more disciplined approach to spending capital. These actions might decrease short-term production but are expected to preserve cash flow, support balance sheet strength and help the companies emerge stronger eventually.

Zacks Industry Rank Indicates Positive Outlook

The Zacks Oil and Gas - US E&P industry is a 47-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #70, which places it in the top 28% 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 improving 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.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are starting to feel optimistic about this group’s earnings growth potential. As a proof of this, the industry’s earnings estimates for 2021 have nearly quadrupled in six months.

Considering the encouraging 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 Mixed on Stock Market Performance

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

The industry has gained 2.4% over this period compared to the S&P 500’s rally of 19.1% and broader sector’s decrease of 16.9%.

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), the industry is currently trading at 7.60X, significantly lower than the S&P 500’s 17.59X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 5.15X.

Over the past five years, the industry has traded as high as 16.85X, as low as 2.79X, with a median of 7.52X.

5 Top Stocks to Buy Now

Pioneer Natural Resources Company: Pioneer Natural Resources is an explorer and producer of oil, natural gas and natural gas liquid. This leading upstream energy firm primarily has operations in the Permian, the most prolific basin in the United States. The company has identified more than 20,000 drilling sites that are likely to provide the company with decades of crude production.

The 2021 Zacks Consensus Estimate for Pioneer Natural Resources indicates 334.48% earnings per share growth over 2020. The company currently carries a Zacks Rank #1 (Strong Buy).

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

Devon Energy: Devon Energy’s recent merger with WPX Energy has strengthened its operations in the prolific Permian Basin. The company’s cost management, divestiture of Canadian assets, and completion of the Barnett Shale gas assets sale will allow it to focus on its holdings in four high-quality oil-rich U.S. basins as well as utilize divestiture proceeds to lower debt levels.

The 2021 Zacks Consensus Estimate for Devon Energy indicates 2,497.14% earnings per share growth over 2020. The company currently carries a Zacks Rank #1.

PDC Energy: PDC Energy is an independent exploration and production operator with the Wattenberg Field in Colorado being its chief operating region. Following the SRC Energy deal last year, PDC Energy has emerged as the second-largest oil producer in the DJ Basin to go with its existing Delaware acreage.

The company has a favorable debt maturity profile with a $200 million convertible note in September 2021 being the only near-term due, while a disciplined approach to capital spending should boost free cash flow generation in 2020 and 2021.   

The 2021 Zacks Consensus Estimate for PDC Energy indicates 165.91% earnings per share growth over 2020. The company currently carries a Zacks Rank #1.

Diamondback Energy: Diamondback Energy focuses on growth through a combination of acquisitions and active drilling in the Permian Basin. Diamondback's leading position in the unconventional play got another leg up with the proposed takeover of QEP Resources (QEP). A low-cost structure and investment grade balance sheet are the other positives in the Diamondback story.

The 2021 Zacks Consensus Estimate for this Midland, TX-based company indicates 78% earnings per share growth over 2020. Diamondback carries a Zacks Rank #2 (Buy).

Apache Corporation: One of the largest oil producers in Permian, Apache has over 1.8 million net acres in the region. The company’s Suriname portfolio is exciting too, where it continues to achieve drilling success. Further, Apache’s returns-focused strategy and aggressive cost management should lead to incremental cash flows.    

The 2021 Zacks Consensus Estimate for this Houston, TX-based company indicates 167.27% earnings per share growth over 2020. Apache carries a Zacks Rank #2.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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