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Analyst Blog

On Sep 28 Zacks Investment Research downgraded Royal Dutch Shell plc (RDS.A - Free Report) – Europe’s largest energy producer – to a Zacks Rank #5 (Strong Sell), placing it in the bottom 5% of all stocks that Zacks ranks.

Why the Downgrade?

The commodity price rout has brutalized Shell’s revenues and earnings. What’s more, the outlook remains grim, with fundamentals suggesting that the odds are firmly stacked against a sustained crude rally. That’s the reason we are predicting a 47% drop in Shell’s EPS this year.

Moreover, Royal Dutch Shell is the most gas-focused among the major companies in the sector, with more than half of its current production from the commodity. Given natural gas’ price struggles – still struggling to breach the psychologically important $3 threshold consistently – this remains a key area of concern, in our view. In fact, the drop in natural gas prices has forced the group to delay final decision on a $40 billion LNG project in Canada.

We also remain worried about the company’s rise in net debt and reduction of liquidity following Shell's $50 billion mega acquisition of BG Group plc. As it is, the combined group's (Shell + BG) capital expenditure is expected to be around $29 billion in 2016, still quite high by industry standards. This is likely to place a substantial burden on the group’s leverage and credit metrics – especially with the challenging external environment.

Finally, lost reserves/production from the group's asset sales in Nigeria and heightened risk related to the company’s remaining operations in the country cannot be ignored either.

5 Alternative Bets in the Energy Space

While Royal Dutch Shell is struggling, several other stocks in the energy space are in much better positions at present. We highlight the following stocks, which being armed with favorable Zacks Rank #1 (Strong Buy) or #2 (Buy), are better options for investment amid the prevailing operating backdrop. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Finally, the chosen ones have VGM Score less than or equal to B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 offer the best upside potential.

Here are the five stocks:

Evolution Petroleum Corp.  (EPM - Free Report) ): Formed in Sep 2003, Evolution Petroleum is a Houston, TX based exploration and production company that develops reserves through the application of conventional and specialized technology to domestic onshore oil and gas resources.

Evolution Petroleum has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of more than 200% for the current fiscal year and surprised earnings to the upside in two of the last four quarters.

China Petroleum and Chemical Corp. (SNP - Free Report) or Sinopec: With its head office in Beijing, Sinopec is one of the largest petroleum and petrochemical companies in Asia.

Sinopec has a Zacks Rank #1 and a VGM Score of B. It has a P/E (F1) of 18.11, which is lower than the industry average of 37.00. Its earnings estimate for the current year has improved by 16% over the last 60 days.

NGL Energy Partners L.P. (NGL - Free Report) : It is a limited partnership operating a vertically integrated propane business with three operating segments: retail propane; wholesale supply and marketing; and midstream.

NGL Energy Partners has a Zacks Rank #1, VGM Score of B and surprised earnings to the upside in each of the last two quarters.

Ultra Petroleum Corp. (UPLMQ - Free Report) : Houston, Texas-based Ultra Petroleum is an independent energy firm engaged in the acquisition, development, exploration and production of oil and gas properties. The company’s operations are focused on the Green River Basin of southwest Wyoming, mainly covering the Pinedale and the Jonah fields.

Ultra Petroleum has a VGM Score of A. Fiscal 2016 Zacks Consensus Estimate for this Zacks Rank #2 company is 77 cents, representing 148% earnings per share growth over fiscal 2015. The next year’s average forecast is $2.53, pointing to 229% growth.

PBF Logistics L.P. (PBFX - Free Report) : Parsippany, NJ-based PBF Logistics operates refined petroleum products storage and transporting facilities.

The partnership has a Zacks Rank #2 and a VGM Score of A. PBF Logistics has an excellent earnings surprise history. It surpassed/met estimates in each of the last four quarters at an average rate of 18.71%.

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