The ongoing oil and gas price plunge is sure to have an adverse effect on most industry components.
Time to Sell These E&P Plays
While all crude-focused stocks stand to lose from falling commodity prices, companies in the E&P sector are the worst placed, as they will be able to extract less value for their products. In particular, we suggest avoiding exposure to mid- and small-cap E&P players.
In particular, we suggest avoiding exposure to mid- and small-cap E&P plays like EXCO Resources Inc. (NYSE:XCO), Halcón Resources Corp. (NYSE:HK), Bonanza Creek Energy Inc. (NYSE:BCEI), Rosetta Resources Inc. (NASDAQ:ROSE) and Oasis Petroleum Inc. (NYSE:OAS). These producers have negative returns year to date and has been witnessing downward earnings consensus estimate revisions for the current quarter and year.
Drillers - Pushed to the Brink by Sinking Oil Prices
As crude price collapse, the top energy companies are expected to cut spending (particularly on the costly drilling projects) on the back of lower profit margins. This, in turn, means less work for the beleaguered drillers that are facing an uphill battle to turn around.
With large, multinational energy firms looking to reign in their skyrocketing capital expenses, the drilling space is likely to see intense competition, as multiple firms chase a single contract. This excess capacity, in turn, could lead to lower utilization or dayrates.
Companies like Helmerich & Payne Inc. (HP), Nabors Industries Ltd. (NBR), Parker Drilling Co. NYSE:PKD) and Patterson-UTI Energy Inc. (NASDAQ:PTEN) look to be in most trouble.
Record Natural Gas Production Keeps Pressure on ‘Gassy Companies’
Looking ahead, EIA expects average total production to rise by 3.1% in 2015, while total natural gas consumption is anticipated to decline next year. We believe these supply/demand dynamics – the projected negative consumption growth in the face of production increase – will weigh on natural gas prices, translating into limited upside for natural gas-weighted companies and related support plays.
In the absence of major production cuts or a stronger economy to boost industrial demand, which is responsible for almost a third of the gas consumption, we do not expect much upside in gas prices in the near term. In other words, there appears no reason to believe that the supply overhang will subside and natural gas will be out of the dumpster in 2015.
In the past, winter weather has played a factor in boosting prices with demand for domestic natural gas exceeding available supply. But with no dearth of new supply, even this association is becoming more and more obsolete.
Consequently, natural gas-weighted exploration and production companies like Chesapeake Energy Corp. (CHK), Cabot Oil & Gas Corp. (COG) and EOG Resources Inc. (EOG) are in for a tough time. Gas-focused partnerships like Williams Partners L.P. (WPZ) and ONEOK Partners L.P. (NYSE:OKS) tend to suffer too, from falling sales for their natural gas liquids (NGL) processing.
Check out our latest Oil & Gas Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy.