Zacks Industry Outlook Highlights: Oasis Petroleum, Marathon Oil, Cimarex Energy, Southwestern Energy And Range Resources

For Immediate Release

Chicago, IL – December 06, 2016 – Today, Zacks Equity Research discusses the Industry: Oil & Gas, including Oasis Petroleum Inc. (NYSE:OAS –Free Report),Marathon Oil Corp (NYSE:MRO). (NYSE:MRO –Free Report),Cimarex Energy Co (NYSE:XEC). (NYSE:XEC –Free Report),Southwestern Energy Co. (NYSE:SWN –Free Report) and Range Resources Corp (NYSE:RRC). (NYSE:RRC – Free Report).

Industry: Oil & Gas

Link: https://www.zacks.com/commentary/97486/oil-gas-industry-outlook---december-2016

We are almost at the last leg of 2016, a year that was marked by unprecedented energy market volatility.

The Story So Far

The year started on a disappointing note with crude prices falling to a 12-year low of $26.21 a barrel in Feb as investors worried about the oversupplied market. The commodity’s collapse threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and pummeling producer profit margins.

However, indications that supply was easing helped oil prices rebound to $50/barrel mark in early Jun. The surge was driven by outages in Nigeria, Libya, Venezuela and Canada – countries that hold some of the world’s major sources of crude. The upward pressure in oil prices also reflected the U.S. Energy Department's inventory releases that showed crude stockpile builds turning into draws. Things were further helped by a continued decline in U.S. crude production.

With factors like Canadian wildfires, Nigerian outages/disruptions, production issues in Venezuela and a strike by Kuwaiti oil workers vanishing from the market, oil slipped back under $40 in the first week of Aug. A glut of refined products also kept the commodity under pressure.

The volatility in oil prices continued with the benchmark touching the $50 threshold again early Oct, buoyed by government figures that continued to show large drawdowns, while investors betted on commitments by Organization of Petroleum Exporting Countries (or OPEC) and non-OPEC players to slash production targets.

When divisions in the cartel became apparent and the future of the ambitious OPEC announcement looked more and more uncertain, the commodity fell back under $45 only to receive a booster shot.

The OPEC Deal

In a bold but not unexpected move, the OPEC cartel agreed on Nov 30 to reduce production starting next month. Seen as a desperate bid to put a floor on falling oil prices, the group – led by Saudi Arabia – promised to take 1.2 million barrels a day out of the market.

OPEC's decision to cut oil production was not totally surprising though the magnitude of reduction were deeper than many analysts had expected. The move aims to trim output to 32.5 million barrels per day -- at the low end of a preliminary agreement struck in September.

Russia, which is not part of the body that pumps a third of the world’s oil, will also join output cuts for the first time in 15 years. The biggest supplier outside the bloc relented from its longstanding position of only freezing production and agreed to cut 300,000 barrels from its record high output of more than 10 million barrels a day.

Oil Prices & Stocks Surge

The OPEC deal had a massive impact on the energy markets, sending crude prices back above $50 a barrel. While the entire sector is roaring higher since the announcement, the independent oil explorers and producers – whose revenues are directly associated with crude price – have been among the best performing stocks. In fact, shares of oil finders like Oasis Petroleum Inc. (NYSE:OAS –Free Report) andMarathon Oil Corp. (NYSE:MRO – Free Report) have exploded higher and climbed to new multi-month highs.

Certain Factors Still Linger

Despite OPEC’s success in reaching an output deal, the oil sector is by no means out of the woods.

The commodity is facing heat on several other fronts. Perhaps most important pertains to the mounting worries about China’s crude demand. In particular, the Asian giant’s currency devaluation has stoked speculation about soft economic growth in the world’s No. 2 energy consumer.

What’s more, the resilience of North American shale suppliers to keep pumping irrespective of prices and concerns over the effects of Brexit on crude demand means that not much upside is expected in prices in the near term. Moreover, a stronger dollar has made the greenback-priced crude more expensive for investors holding foreign currency. Stronger focus on cleaner energy and weakness in industrial production worldwide are also holding back oil consumption.

As it is, with inventories near the upper limit of the average range for this time of year, crude is very well stocked and it still looks like the commodity is in an environment of excess supply. Therefore, while the OPEC-driven rally is likely to drive up prices by a few dollars, it certainly can’t be termed a seismic event.

Our View

In our view, crude prices in the next few months are likely to exhibit a sideways-to-bullish trend, mostly trading in the $50-$55 per barrel range. As North American supply remains strong and demand looks underwhelming, oil is likely to maintain its low trajectory throughout at least the first half of 2017.

Natural Gas

Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations or shale formations – has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.

With the advent of hydraulic fracturing (or "fracking") – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves. As a result, once faced with a looming deficit, natural gas is now available in abundance.

Prices Fell to 17-Year Lows Earlier in 2016

With production from the major shale plays remaining strong and the commodity’s demand failing to keep pace with this supply surge, natural gas prices hit 17-year lows of around $1.6 per million British thermal units (MMBtu) in the first quarter. The glut was further exacerbated by lackluster industrial requirement over the past few years.

And Then Recovered Strongly

Since then, successive below-average builds on the back of warmer temperature across the country followed by the recent start of the withdrawal season, has been cutting into the year-over-year storage surplus. Statistically speaking, the current storage level – at around 4 trillion cubic feet (Tcf) is up only slightly from last year and is just 6% above the five-year average. As a result, natural gas prices have rebounded strongly and doubled from the extreme lows it hit in Mar. The dramatic recovery has helped the commodity stay above the key psychological level of $3 per MMBtu

The price strength has translated into major gains for natural gas-weighted firms including the likes of Cimarex Energy Co. (NYSE:XEC –Free Report) ,Southwestern Energy Co. (NYSE:SWN –Free Report) andRange Resources Corp. (NYSE:RRC – Free Report) – all Zacks Rank #3 (Hold) companies – which have popped up 50% or more year-to-date. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .

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