Both oil and natural gas have rebounded from their multi-year lows reached in 2016 and while the commodities may not be at levels many thought they would be at the end of the year, even at today’s prices certain companies are in a position to earn profits.
As a proof, over the past four quarters, the number of rigs searching for oil and gas in the country have been surging. According to Baker Hughes, the GE-owned company’s closely watched weekly report, the oil rig count was 765 last week and the natural gas rig count was 187 – each of them more than doubling from year-earlier levels.
Throughout the downturn, energy firms worked tirelessly to cut costs down 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 producers.
Oil’s recovery to $45 and natural gas touching the magic $3, predictably, has had a positive effect on stocks in the sector. In particular, savvy investors might view the price bump as the impetus the stocks need after freefalling for three years. Undoubtedly, still a long way to go, but improving crude and natural gas prices may have already primed certain energy producers and linked entities for upward momentum.
True, the energy market faces many uncertainties and it may not be time to buy stocks indiscriminately, but there are players that look like pretty compelling investments.
Good Time to Buy High Quality E&P Names
Oil prices have gained almost 10% since falling to a ten-month low in late June. The recent rebound has been fueled by multiple weeks of strong inventory draws in the U.S. crude and gasoline stockpiles.
While all crude-focused stocks stand to gain from the nascent oil rally, companies in the exploration and production (E&P) sector are the best placed, as they will be able to extract more value for their products.
Moreover, the firms boast conservative balance sheets with enough cash on hand and manageable leverage. This provides them ample flexibility to make acquisitions or grow internally. Moreover, driven by operational efficiencies, these entities have been able to reduce unit costs -- an impressive achievement amid the low realization scenario.
Apart from Zacks Rank #1 (Strong Buy) Canadian Natural Resources Ltd. (CNQ - Free Report) , we advocate the likes of Jones Energy Inc. (JONE - Free Report) and Gulfport Energy Corp. (GPOR - Free Report) . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Jump in Exports to Support Natural Gas
Despite the uncertain natural gas fundamentals and the understandable reluctance on the investors’ part to dip their feet into these stocks, the year-on-year comparison for the commodity is looking good. Prices this year are up around 10% from where they were twelve months back, while natural gas inventory is 289 Bcf (or 8.9%) below the year-ago figure.
New pipelines to Mexico and the startup of the Sabine Pass LNG terminal in Louisiana – North America’s first large-scale liquefied gas export facility – have meant that exports out of the U.S. have taken a quantum leap. In fact, as per the Energy Department, gross liquefied natural gas exports are set to average 1.9 billion cubic feet per day in 2017, almost quadrupling from last year.
While domestic natural gas production is expected to rebound this year, replacing coal-fired power plants and higher demand from industrial projects will likely take care of the increased output.
The resulting effect will ensure natural gas storage keeping pace with the 5-year average in the near future, with deficits piling up later on. Over the summer, these secular headwinds will start to have a positive impact on natural gas sentiment and price.
As a result, the EIA projects natural gas prices to average $3.10 per million British thermal units (MMBtu) in 2017, compared with a 2016 average of $2.51/MMBtu. This bodes well for companies like Cheniere Energy Inc. (LNG - Free Report) , Range Resources Corp. (RRC - Free Report) and Antero Resources Corp. (AR - Free Report) - those that produce and market the fuel. Gas-focused partnerships like Williams Partners L.P. (WPZ - Free Report) and distributors like ONEOK Inc. (OKE - Free Report) tend to benefit too, from rising sales for their natural gas liquids (NGL) processing.
Pipeline Stocks Continue to Be a Great Investment Opportunity
The surge in oil and natural gas production over the past few years have made pipelines, storage and associated infrastructure attractive bets in the energy midstream space. This is because these network providers derive a major portion of their revenues from fee-based contracts based on volume and are largely insensitive to commodity price fluctuations.
Moreover, the pipelines transporting liquids and natural gas enjoy steady demand for their services even if the overall economy slows down. As a result, many pipeline stocks can produce consistent cash flows and shell out generous payouts.
As it is, units of energy infrastructure master limited partnerships (or MLPs) have seen renewed interest from investors after President Trump took steps to fast-track two controversial oil pipeline projects.
In his short time as President, Donald Trump is being credited with the revival of the U.S. MLP sector that was reeling under the twin forces of a prolonged oil price slump and bitter opposition from environmental activists.
Making good on his campaign promises to rev up infrastructure spending, President Trump signed executive orders to smooth the way for TransCanada Corp.’s (TRP - Free Report) Keystone XL Pipeline and Energy Transfer Partners L.P.’s (ETP) Dakota Access Pipeline just a few days into his new administration.
With the U.S. government indicating that it will expedite approvals of future developments as part of new energy infrastructure projects, the benchmark Alerian MLP Index AMLP is currently up more than 55% from its Feb 2016 lows.
Moreover, given the current volatility in petroleum stocks, MLPs are probably the best method of investing in the sector. They also offer liquidity and tax benefits, which add to their appeal. This is why these stocks would make good additions to your portfolio.
With capital market access remaining tough for most sector components, we suggest buying stocks with clean balance sheets. Our picks would include the likes of Enbridge Energy Partners L.P. (EEP - Free Report) , Boardwalk Pipeline Partners L.P. (BWP - Free Report) and Crestwood Equity Partners L.P. (CEQP - Free Report) .
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.
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