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Bet on 3 US Upstream Energy Stocks With Low Debt Exposure
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The U.S. upstream energy sector has witnessed steep ups and downs in the past few months. A volatile market environment has shaken the companies operating in the industry. Notably, low crude prices affected the companies’ bottom line in the second quarter. Also, some companies had to announce bankruptcy on account of the same. However, things are improving again. Here, we will talk about the current situation in the industry and discuss three stocks that can tide over any market uncertainty with their strong financials.
Improving Crude Price
Owing to coronavirus-induced demand destruction, crude price plunged to historical lows (negative at one point) but then gradually witnessed tremendous recovery. WTI is now on an upswing, with the U.S. benchmark lingering above $42 a barrel. The easing of lockdown measures around the globe has improved the demand outlook amid successful production cut compliance by the OPEC+ group members. Adding to the supply reduction woes, several producers — including Diamondback Energy (FANG - Free Report) , Devon Energy (DVN - Free Report) and ConocoPhillips (COP - Free Report) — slashed U.S. production. This somewhat balanced the excess supply in the market.
Natural Gas Price to Soar
Natural gas prices have been gently rising since production took a hit. The oil industry reacted to sharply falling prices by rushing to scale back output and that limited associated gas output. This is expected to reduce the massive supply glut. Last month, the Henry Hub natural gas spot price averaged $1.77 per million British thermal units (MMBtu), up from the June level of $1.63 MMBtu, per U.S. Energy Information Administration (“EIA”). The EIA expects that reduced production and increased demand heading into winter might boost prices. It also estimates natural gas price to average $2.11 per thousand cubic feet in 2020 and $3.25 in 2021. Higher natural gas prices will boost the upstream companies’ bottom line.
Cost Minimization
Over the past few years, oil and gas producers have not only worked tirelessly to cut costs to a bare minimum but also looked for innovative ways to churn out more hydrocarbons. They have managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers. Moreover, driven by operational efficiencies, most of the upstream players have been able to reduce unit costs. The ongoing collapse in crude is forcing them to adopt a more disciplined approach to spend capital. While such actions might decrease short-term production, these are expected to preserve cash flow, support the balance sheet and help the companies emerge stronger in the second half of the year.
Even though coronavirus-induced demand destruction has affected upstream players, the above-mentioned factors will likely enable the companies to witness growth in the coming days. Investors can tap into the profits with smart investment in stocks with strong operations and balance sheet. Companies with a strong balance sheet can muscle through market weaknesses. We have selected three such companies with long-term debt below $6 billion and debt-to-capitalization ratios below the industry average, which can provide the firms with ample financial flexibility. These companies also hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Companies to Focus on
At the end of second-quarter 2020, Pioneer Natural Resources Company’s (PXD - Free Report) cash balance totaled $180 million. Long-term debt was $2,054 million, reflecting a debt to capitalization of 15.7%, lower than industry average of 37.8%. The upstream energy player’s debt to capitalization has been persistently lower than the industry over the past few years, reflecting considerably less debt exposure. Despite an unfavorable business scenario owing to coronavirus-induced dented energy demand, the company is capable of clearing long-term debt with its cash balance and $1.5 billion of credit facilities. Low leverage positions it well ahead of peers to emerge from downturns.
Concho Resources Inc.’s total long-term debt is currently around $4 billion, with $320 million in cash & cash equivalents. Its debt-to-total capital of 33.3% is below the industry average. The company has $2 billion in unused credit capacity. Moreover, Concho Resources has no near-term maturities. Therefore, the company seems to be in a decent financial position to overcome any market uncertainty.
EOG Resources, Inc.’s (EOG - Free Report) balance sheet is significantly less levered than the composite stocks belonging to the industry. In fact, the company’s debt to capitalization — which was 21.9% at second quarter-end — has consistently been lower than the industry over the past five years. EOG Resources’ cash balance of $2,416.5 million is more than sufficient to pay the current debt of only $21.1 million. It had a long-term debt of $5,703.1 million at second quarter-end.
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Bet on 3 US Upstream Energy Stocks With Low Debt Exposure
The U.S. upstream energy sector has witnessed steep ups and downs in the past few months. A volatile market environment has shaken the companies operating in the industry. Notably, low crude prices affected the companies’ bottom line in the second quarter. Also, some companies had to announce bankruptcy on account of the same. However, things are improving again. Here, we will talk about the current situation in the industry and discuss three stocks that can tide over any market uncertainty with their strong financials.
Improving Crude Price
Owing to coronavirus-induced demand destruction, crude price plunged to historical lows (negative at one point) but then gradually witnessed tremendous recovery. WTI is now on an upswing, with the U.S. benchmark lingering above $42 a barrel. The easing of lockdown measures around the globe has improved the demand outlook amid successful production cut compliance by the OPEC+ group members. Adding to the supply reduction woes, several producers — including Diamondback Energy (FANG - Free Report) , Devon Energy (DVN - Free Report) and ConocoPhillips (COP - Free Report) — slashed U.S. production. This somewhat balanced the excess supply in the market.
Natural Gas Price to Soar
Natural gas prices have been gently rising since production took a hit. The oil industry reacted to sharply falling prices by rushing to scale back output and that limited associated gas output. This is expected to reduce the massive supply glut. Last month, the Henry Hub natural gas spot price averaged $1.77 per million British thermal units (MMBtu), up from the June level of $1.63 MMBtu, per U.S. Energy Information Administration (“EIA”). The EIA expects that reduced production and increased demand heading into winter might boost prices. It also estimates natural gas price to average $2.11 per thousand cubic feet in 2020 and $3.25 in 2021. Higher natural gas prices will boost the upstream companies’ bottom line.
Cost Minimization
Over the past few years, oil and gas producers have not only worked tirelessly to cut costs to a bare minimum but also looked for innovative ways to churn out more hydrocarbons. They have managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers. Moreover, driven by operational efficiencies, most of the upstream players have been able to reduce unit costs. The ongoing collapse in crude is forcing them to adopt a more disciplined approach to spend capital. While such actions might decrease short-term production, these are expected to preserve cash flow, support the balance sheet and help the companies emerge stronger in the second half of the year.
Even though coronavirus-induced demand destruction has affected upstream players, the above-mentioned factors will likely enable the companies to witness growth in the coming days. Investors can tap into the profits with smart investment in stocks with strong operations and balance sheet. Companies with a strong balance sheet can muscle through market weaknesses. We have selected three such companies with long-term debt below $6 billion and debt-to-capitalization ratios below the industry average, which can provide the firms with ample financial flexibility. These companies also hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Companies to Focus on
At the end of second-quarter 2020, Pioneer Natural Resources Company’s (PXD - Free Report) cash balance totaled $180 million. Long-term debt was $2,054 million, reflecting a debt to capitalization of 15.7%, lower than industry average of 37.8%. The upstream energy player’s debt to capitalization has been persistently lower than the industry over the past few years, reflecting considerably less debt exposure. Despite an unfavorable business scenario owing to coronavirus-induced dented energy demand, the company is capable of clearing long-term debt with its cash balance and $1.5 billion of credit facilities. Low leverage positions it well ahead of peers to emerge from downturns.
Concho Resources Inc.’s total long-term debt is currently around $4 billion, with $320 million in cash & cash equivalents. Its debt-to-total capital of 33.3% is below the industry average. The company has $2 billion in unused credit capacity. Moreover, Concho Resources has no near-term maturities. Therefore, the company seems to be in a decent financial position to overcome any market uncertainty.
EOG Resources, Inc.’s (EOG - Free Report) balance sheet is significantly less levered than the composite stocks belonging to the industry. In fact, the company’s debt to capitalization — which was 21.9% at second quarter-end — has consistently been lower than the industry over the past five years. EOG Resources’ cash balance of $2,416.5 million is more than sufficient to pay the current debt of only $21.1 million. It had a long-term debt of $5,703.1 million at second quarter-end.
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 8 stocks to watch. The report is only available for a limited time.
See 8 breakthrough stocks now>>