For Immediate Release
Chicago, IL – September 25, 2020 – Today, Zacks Equity Research discusses the Oil and Gas - E&P, including Pioneer Natural Resources Co. PXD, Concho Resources CXO, Murphy Oil MUR, Laredo Petroleum LPI and SilverBow Resources SBOW.
Industry: Oil and Gas - E&P
The crash in energy demand engineered by the unprecedented steps to contain the coronavirus hit the Zacks Oil and Gas - Exploration and Production - United States industry hard, whipsawing stocks and futures. But it seems crude’s worst losses are in the rear-view mirror with signs of gradual rebalancing. Natural gas fundamentals are also expected to improve on lower associated output tied to the brake in shale oil production.
An uptick in commodity prices could lift shares of upstream firms like Pioneer Natural Resources Co., Concho Resources, Murphy Oil, Laredo Petroleum and SilverBow Resources.
About the Industry
The Zacks Oil and Gas - US E&P industry consists of companies 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.
3 Key Investing Trends to Watch in the Oil and Gas - US E&P Industry
Improved Pricing Backdrop: The price of WTI crude — the U.S. benchmark — has come a long way since the depths of minus $38 a barrel in April. Trading just under $40 a barrel, the oil market is expected to be supported by the OPEC+ cuts through the remainder of 2020.
Meanwhile, natural gas price recently rallied to its highest in 2020 on the back of a ramp up in air conditioning use as a result of a scorching summer, lower associated gas output tied to the brake in shale oil production growth, and steady improvement in shipments of LNG for export. The oil and gas price gains will greatly benefit the results of E&P companies for obvious reasons.
Lingering Signs of Demand Weakness: The impressive rally notwithstanding, oil prices are unlikely to move much higher as commercial passenger flights remain curtailed. In particular, the usage of distillates such as aviation fuel continues to be weak with air travel essentially grounded.
As long as the coronavirus outbreak continues (as is now the case in India and a second wave across Europe), there will be pressure on the demand side of the equation. Per the International Energy Agency (“IEA”), the degree of recovery in oil consumption is expected to decelerate through the remainder of this year driven by localized lockdowns and containment measures to tackle the recent increase in COVID-19 cases.
Sustained Efforts to Maintain Capital Discipline: 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. These actions might decrease short-term production but are expected to preserve cash flow, support balance sheet strength and help the companies emerge stronger toward the end of this year.
Zacks Industry Rank Indicates Struggles Ahead
The Zacks Oil and Gas - US E&P is a 54-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #168, which places it in the bottom 33% 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 bearish 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. While the industry’s earnings estimates for 2020 have decreased 94.9% in the past year, the same for 2021 have moved down 66.5%.
Despite the bleak 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 45.5% over this period compared with the broader sector’s decrease of 41.5%. In contrast, the S&P 500 has risen 12.2%.
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 4.69X, significantly lower than the S&P 500’s 13.95X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 3.97X.
Over the past five years, the industry has traded as high as 16.44X, as low as 2.99X, with a median of 6.67X.
5 Oil and Gas - US E&P Stocks to Weather the Commodity Downturn
Laredo Petroleum: This Permian Basin-focused upstream operator currently carries a Zacks Rank #1 (Strong Buy). Laredo Petroleum banks on its oily, high-margin inventory of assets to tide over the difficult operating environment.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Over the past 60 days, this Tulsa, OK-based company has seen the Zacks Consensus Estimate for 2020 surge 200.6%. The stock has gained 10.8% over the past six months.
SilverBow Resources: A pure-play upstream operator in the Eagle Ford Shale in South Texas, SilverBow Resources is a natural gas-focused E&P company. SilverBow controls 165,000 net acres in the Eagle Ford and 79% of its total output comprises natural gas. The company’s exposure to premium Gulf Coast markets and a competitive cost structure are its investment highlights.
Over the past 60 days, this #1 Ranked company has seen the Zacks Consensus Estimate for 2020 increase 16.9%. The stock has surged 74.8% over the past six months.
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, carrying a Zacks Rank #2 (Buy), 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
Over the past 60 days, this Irving, TX-based company has seen the Zacks Consensus Estimate for 2020 go up by 22.1%. The stock has gained 20.2% over the past six months.
Concho Resources: Concho Resources is known for its strategic acreage position in the low-cost Permian Basin. Spanning 800,000 gross (550,000 net) acres, the company’s assets are spread over high quality land across the core Delaware and Midland Basins. Concho Resources expects oil production to remain unchanged in 2020 despite lowering capital budget by 40%.
Over the past 60 days, this #2 Ranked company has seen the Zacks Consensus Estimate for 2020 increase 16.9%. The stock has edged down 0.9% over the past six months.
Murphy Oil: Murphy Oil possesses one of the best upstream portfolios among the domestic oil and natural gas integrated companies and independent E&P group. The company has a target to lower its 2020 G&A expenses by nearly 40% from the 2019 reading and roughly 50% from the 2015-level, which will definitely have a positive impact on its margins.
Over the past 60 days, this El Dorado, AR-based company has seen the Zacks Consensus Estimate for 2020 improve 41.6%. This Zacks Rank #2 stock has gained 39.2% over the past six months.
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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/performancefor information about the performance numbers displayed in this press release.
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Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
Murphy Oil Corporation (MUR) : Free Stock Analysis Report
Concho Resources Inc. (CXO) : Free Stock Analysis Report
Laredo Petroleum, Inc. (LPI) : Free Stock Analysis Report
SilverBow Resources Inc. (SBOW) : Free Stock Analysis Report
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