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Zacks Industry Outlook Highlights APA, Antero Resources, Comstock Resources, Northern Oil and Gas and Earthstone Energy
Read MoreHide Full Article
For Immediate Release
Chicago, IL – October 19, 2022 – Today, Zacks Equity Research discusses APA Corp. (APA - Free Report) , Antero Resources (AR - Free Report) , Comstock Resources (CRK - Free Report) , Northern Oil and Gas (NOG - Free Report) and Earthstone Energy .
While the commodity benchmarks have retreated from their multi-year highs on recession fears, they are strong enough for the Zacks Oil and Gas - Exploration and Production - United States industry to notch substantial gains during the remainder of this year. In this context, investors might want to focus on APA Corp., Antero Resources, Comstock Resources, Northern Oil and Gas and Earthstone Energy for attractive cash flow and shareholder returns.
About the Industry
The Zacks Oil and Gas - US E&P industry consists of companies primarily based in the domestic market, focused on the exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc.
The economics of oil and gas supply and demand is the fundamental driver of this industry. In particular, a producer’s cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns and causes them to alter their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
4 Key Investing Trends to Watch in the Oil and Gas - US E&P Industry
Oil, Gas Prices Stay Up: Even as fears revolving around high inflation and slowing growth somewhat cloud the outlook for oil, the space continues to remain healthy. Apart from a positive fundamental picture, the sector has been enjoying support from geopolitical uncertainty amid Russia’s military operations in Ukraine.
With the conflict showing no sign of a quick resolution, the risk of dwindling inventory and the influential oil exporters’ group OPEC agreeing on a production curtailment, the commodity has got enough reasons to stay above the $80-level in the near-to-medium term. The market has also been kind to natural gas in 2022, with the commodity trading considerably higher year to date and hitting $10 for the first time since 2008.
The one thing supporting natural gas is a stable demand catalyst in the form of continued strong LNG feedgas deliveries. LNG shipments for export from the United States have been robust for months on the back of environmental reasons and record-high prices of the super-chilled fuel elsewhere. Now, with the Russia-Ukraine conflict, LNG has become even more coveted.
Shale Producers’ Guarded Response: Unlike previous occasions, this time, U.S. shale operators have been reluctant to turn the tap on production despite the rise in oil realizations. Most of them were forced to dial back output in response to the COVID-induced decimation in demand and prices. Generally, the shale patch constituents are quick to pick up drilling activities on any steep rise in the price, which may thwart the fuel’s bull run.
Yet, this time, the companies seem to be in no hurry to boost output. Finally, learning their lesson, shale operators are focusing primarily on improving cost and increasing free cash flow rather than looking at boosting production. While oil at $90 is profitable for almost all shale entities, the industry, for its part, is sticking to the mantra of capital discipline and sustainable production.
According to the weekly data provided by Houston-based Baker Hughes, the last time that WTI crude traded at these levels, some 1,600 oil rigs were operational. Now, it’s just above 600, which is proof of the wariness on the part of the producers to raise output too quickly.
Sustainable Cost-Cutting Efforts: The energy companies have changed their approach to spending capital. Over the past few years, producers have 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 forced them to adopt a more disciplined approach to spending capital.
These actions might restrict short-term production but are expected to preserve cash flow, support balance sheet strength, and help the companies to eventually emerge stronger. In particular, despite continued inflation and supply-chain challenges, cash from operations is on a sustainable path as revenues improve and companies slash capital expenditures from the pre-pandemic levels amid sharply higher commodity prices.
Notable Shareholder Returns: The sharp increase in crude prices has allowed the upstream operators to deliver a solid financial performance. Cash from operations looks sustainable as revenues improve and companies cut capital expenditures from the pre-pandemic levels amid sharply higher commodity realizations.
To put it simply, the environment of strong prices has helped the E&P firms to generate significant “excess cash,” which they intend to use to boost investor returns. In fact, energy companies are increasingly allocating their rising cash pile by way of dividends and buybacks to pacify the long-suffering shareholders.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - US E&P industry is a 40-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #37, which places it in the top 15% 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 fairly strong 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 highly optimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2022 have surged 62.4% in the past year, the same for 2023 have risen 86.5% over the same timeframe.
Considering the encouraging dynamics 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 the current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - US E&P industry has fared better than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has gone up 32.2% over this period compared with the broader sector’s increase of 16.1%. Meanwhile, the S&P 500 has lost 21.2%.
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 5.03X, significantly lower than the S&P 500’s 10.95X. It is, however, well above the sector’s trailing-12-month EV/EBITDA of 3.40X.
Over the past five years, the industry has traded as high as 16.47X, as low as 2.90X, with a median of 6.62X.
5 Top Stocks to Buy Now
Comstock Resources: Comstock is a leading operator in the Haynesville shale — a premier natural gas basin — with 323,000 net acres. About 98% of the company’s total output is natural gas. A low-cost provider, the company’s leadership position in Haynesville provides it access to the Gulf Coast and an attractive pricing advantage. Comstock’s 1,900+ high-return net drilling locations support its development program, while its conservative operating plan drives free cash flow.
Earthstone Energy: An oil producer targeting Midland Basin of west Texas and the Eagle Ford trend of south Texas., ESTE focuses on growth through a combination of acquisitions and active drilling. The company’s impressive acreage position in the top basins provides it with some 13 years of high-quality inventory life. With a reinvestment rate of just 50%, Earthstone is able to create robust free cash generation.
Over 60 days, ESTE has seen the Zacks Consensus Estimate for 2022 increase 13.9%. The Zacks Rank #2 (Buy) ESTE’s shares have gained 33.6% in a year.
Northern Oil and Gas: Northern Oil and Gas’ core operations are focused on three leading basins of the United States — the Williston, Permian and the Appalachian. The upstream operator employs a unique nonoperating business model, which helps it to keep costs down and increase free cash flow. Prioritizing returns to investors, NOG pays a 25 cents per share quarterly base dividend and is looking to hike it by another 20%.
Carrying a Zacks Rank of 2, the 2022 Zacks Consensus Estimate for Northern Oil and Gas indicates 105.2% earnings per share growth over 2021. NOG’s shares have gained 34.4% in a year.
APA Corporation: APA’s large geographically diversified reserve base and high-quality drilling inventory should guarantee multi-year production growth. The company’s increased focus on the Permian basin, known for its low cost and high internal rates of return, is another key driver. APA’ slew of discoveries in offshore Suriname, through its joint venture with TotalEnergies, is another positive catalyst for the company. Over time, Suriname is expected to become one of APA’s major assets with significant cash flow potential.
The 2022 Zacks Consensus Estimate for APA indicates 134.6% earnings per share growth over 2021. The company currently carries a Zacks Rank #2. Meanwhile, APA has seen its shares gain 49.3% in a year.
Antero Resources: Antero Resources has positioned itself among the fast-growing natural gas producers in the United States. The company's strategic acreage position in the low-risk and long reserve-life properties of the Appalachian Basin is a major positive. Cashing in on high commodity prices, AR expects to generate more than $2.5 billion of free cash flow in 2022.
The 2022 Zacks Consensus Estimate for Antero Resources indicates 364.6% earnings per share growth over 2021. Antero Resources currently carries a Zacks Rank #2. Meanwhile, the hydrocarbon producer has seen its shares increase 67.2% in a year.
Why Haven’t You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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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Zacks Industry Outlook Highlights APA, Antero Resources, Comstock Resources, Northern Oil and Gas and Earthstone Energy
For Immediate Release
Chicago, IL – October 19, 2022 – Today, Zacks Equity Research discusses APA Corp. (APA - Free Report) , Antero Resources (AR - Free Report) , Comstock Resources (CRK - Free Report) , Northern Oil and Gas (NOG - Free Report) and Earthstone Energy .
Industry: Oil & Gas - E&P
Link: https://www.zacks.com/commentary/1993243/more-appreciation-on-the-horizon-for-these-5-us-upstream-stocks
While the commodity benchmarks have retreated from their multi-year highs on recession fears, they are strong enough for the Zacks Oil and Gas - Exploration and Production - United States industry to notch substantial gains during the remainder of this year. In this context, investors might want to focus on APA Corp., Antero Resources, Comstock Resources, Northern Oil and Gas and Earthstone Energy for attractive cash flow and shareholder returns.
About the Industry
The Zacks Oil and Gas - US E&P industry consists of companies primarily based in the domestic market, focused on the exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc.
The economics of oil and gas supply and demand is the fundamental driver of this industry. In particular, a producer’s cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns and causes them to alter their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
4 Key Investing Trends to Watch in the Oil and Gas - US E&P Industry
Oil, Gas Prices Stay Up: Even as fears revolving around high inflation and slowing growth somewhat cloud the outlook for oil, the space continues to remain healthy. Apart from a positive fundamental picture, the sector has been enjoying support from geopolitical uncertainty amid Russia’s military operations in Ukraine.
With the conflict showing no sign of a quick resolution, the risk of dwindling inventory and the influential oil exporters’ group OPEC agreeing on a production curtailment, the commodity has got enough reasons to stay above the $80-level in the near-to-medium term. The market has also been kind to natural gas in 2022, with the commodity trading considerably higher year to date and hitting $10 for the first time since 2008.
The one thing supporting natural gas is a stable demand catalyst in the form of continued strong LNG feedgas deliveries. LNG shipments for export from the United States have been robust for months on the back of environmental reasons and record-high prices of the super-chilled fuel elsewhere. Now, with the Russia-Ukraine conflict, LNG has become even more coveted.
Shale Producers’ Guarded Response: Unlike previous occasions, this time, U.S. shale operators have been reluctant to turn the tap on production despite the rise in oil realizations. Most of them were forced to dial back output in response to the COVID-induced decimation in demand and prices. Generally, the shale patch constituents are quick to pick up drilling activities on any steep rise in the price, which may thwart the fuel’s bull run.
Yet, this time, the companies seem to be in no hurry to boost output. Finally, learning their lesson, shale operators are focusing primarily on improving cost and increasing free cash flow rather than looking at boosting production. While oil at $90 is profitable for almost all shale entities, the industry, for its part, is sticking to the mantra of capital discipline and sustainable production.
According to the weekly data provided by Houston-based Baker Hughes, the last time that WTI crude traded at these levels, some 1,600 oil rigs were operational. Now, it’s just above 600, which is proof of the wariness on the part of the producers to raise output too quickly.
Sustainable Cost-Cutting Efforts: The energy companies have changed their approach to spending capital. Over the past few years, producers have 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 forced them to adopt a more disciplined approach to spending capital.
These actions might restrict short-term production but are expected to preserve cash flow, support balance sheet strength, and help the companies to eventually emerge stronger. In particular, despite continued inflation and supply-chain challenges, cash from operations is on a sustainable path as revenues improve and companies slash capital expenditures from the pre-pandemic levels amid sharply higher commodity prices.
Notable Shareholder Returns: The sharp increase in crude prices has allowed the upstream operators to deliver a solid financial performance. Cash from operations looks sustainable as revenues improve and companies cut capital expenditures from the pre-pandemic levels amid sharply higher commodity realizations.
To put it simply, the environment of strong prices has helped the E&P firms to generate significant “excess cash,” which they intend to use to boost investor returns. In fact, energy companies are increasingly allocating their rising cash pile by way of dividends and buybacks to pacify the long-suffering shareholders.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - US E&P industry is a 40-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #37, which places it in the top 15% 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 fairly strong 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 highly optimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2022 have surged 62.4% in the past year, the same for 2023 have risen 86.5% over the same timeframe.
Considering the encouraging dynamics 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 the current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - US E&P industry has fared better than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has gone up 32.2% over this period compared with the broader sector’s increase of 16.1%. Meanwhile, the S&P 500 has lost 21.2%.
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 5.03X, significantly lower than the S&P 500’s 10.95X. It is, however, well above the sector’s trailing-12-month EV/EBITDA of 3.40X.
Over the past five years, the industry has traded as high as 16.47X, as low as 2.90X, with a median of 6.62X.
5 Top Stocks to Buy Now
Comstock Resources: Comstock is a leading operator in the Haynesville shale — a premier natural gas basin — with 323,000 net acres. About 98% of the company’s total output is natural gas. A low-cost provider, the company’s leadership position in Haynesville provides it access to the Gulf Coast and an attractive pricing advantage. Comstock’s 1,900+ high-return net drilling locations support its development program, while its conservative operating plan drives free cash flow.
The 2022 Zacks Consensus Estimate for Zacks Rank #1 (Strong Buy) CRK indicates 231.9% earnings per share growth over 2021. Comstock’s shares have gained 85.7% in a year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earthstone Energy: An oil producer targeting Midland Basin of west Texas and the Eagle Ford trend of south Texas., ESTE focuses on growth through a combination of acquisitions and active drilling. The company’s impressive acreage position in the top basins provides it with some 13 years of high-quality inventory life. With a reinvestment rate of just 50%, Earthstone is able to create robust free cash generation.
Over 60 days, ESTE has seen the Zacks Consensus Estimate for 2022 increase 13.9%. The Zacks Rank #2 (Buy) ESTE’s shares have gained 33.6% in a year.
Northern Oil and Gas: Northern Oil and Gas’ core operations are focused on three leading basins of the United States — the Williston, Permian and the Appalachian. The upstream operator employs a unique nonoperating business model, which helps it to keep costs down and increase free cash flow. Prioritizing returns to investors, NOG pays a 25 cents per share quarterly base dividend and is looking to hike it by another 20%.
Carrying a Zacks Rank of 2, the 2022 Zacks Consensus Estimate for Northern Oil and Gas indicates 105.2% earnings per share growth over 2021. NOG’s shares have gained 34.4% in a year.
APA Corporation: APA’s large geographically diversified reserve base and high-quality drilling inventory should guarantee multi-year production growth. The company’s increased focus on the Permian basin, known for its low cost and high internal rates of return, is another key driver. APA’ slew of discoveries in offshore Suriname, through its joint venture with TotalEnergies, is another positive catalyst for the company. Over time, Suriname is expected to become one of APA’s major assets with significant cash flow potential.
The 2022 Zacks Consensus Estimate for APA indicates 134.6% earnings per share growth over 2021. The company currently carries a Zacks Rank #2. Meanwhile, APA has seen its shares gain 49.3% in a year.
Antero Resources: Antero Resources has positioned itself among the fast-growing natural gas producers in the United States. The company's strategic acreage position in the low-risk and long reserve-life properties of the Appalachian Basin is a major positive. Cashing in on high commodity prices, AR expects to generate more than $2.5 billion of free cash flow in 2022.
The 2022 Zacks Consensus Estimate for Antero Resources indicates 364.6% earnings per share growth over 2021. Antero Resources currently carries a Zacks Rank #2. Meanwhile, the hydrocarbon producer has seen its shares increase 67.2% in a year.
Why Haven’t You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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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.