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US Exploration Industry Holds Up Well: 4 Oil Stocks to Buy
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The energy sector has always been a key driver of the quarterly outperformance of the S&P 500 index. In the fourth quarter, the index recorded year-over-year earnings growth of 13.5%. However, excluding Energy, S&P 500’s earnings growth was 11.2%. Also, for first-quarter 2018, we expect Energy to surpass all other sectors, posting earnings growth of 65.7%.
Among all the industries belonging to the Energy sector, Oil & Gas-US Exploration & Production seems lucrative with healthy free cash flow and declining debt load. Partial crude price recovery is also a positive for the industry.
Oil & Gas-U.S. Exploration & Production Industry
The firms belonging to this industry are involved in exploration and production of oil and natural gas in prospective resources – like the Permian basin, Eagle Ford, Utica and the Appalachian basin – spread all over the United States.
Operating in this industry needs huge capital spending. The explorers are vulnerable to volatility in oil and gas prices. But, the industry is rewarding too. Partial recovery in oil prices is highly favorable for this industry. From the historical low-mark of $26.21 per barrel hit in February 2016, the West Texas Intermediate (WTI) crude rose beyond the $60 psychological level. The extension of the production cut deal, first signed in late 2016, by the OPEC players through the end of 2018, primarily initiated the rally in crude.
Per the U.S Energy Information Administration (EIA), average WTI crude prices for the first two months of 2018 have been $63.70 per barrel and $62.23 per barrel, respectively. The average monthly oil price had never traded near the $60 per barrel mark since 2015.
The Analysis
There are few parameters that clearly show that investors willing to invest in the energy space should consider this industry.
Industry Rank
In terms of the Zacks Industry Rank, the Oil & Gas-US Exploration & Production industry is among the top performing industries.
The industry is ranked #96 and lies in the top 38% of all industries. The industry has a good industry rank, as the top 50% of the Zacks Ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Decent Upside Potential
We have employed a trailing 12-month Enterprise Multiple for determining the value of the industry. This is because oil energy players typically shoulder significant debt for investing in growth projects and EV includes debt for valuing a company or industry.
Enterprise Multiple = Enterprise Value (EV)/EBITDA
We calculate the current EV/EBITDA value for Oil & Gas-US Exploration & Production industry at 12.99. Although the stock’s current valuation is higher than its five-year median EV/ EBITDA of 6.96, the current value is still lower than its five-year high EV/EBITDA of 16.61, reflecting the industry’s healthy upside potential.
Sufficient Free Cash Flow to Fund Capital Spending
After subtracting capital spending from operating cash flow, we get free cash flow. This is one of the most important parameters when it comes to exploration activities. Positive free cash flow for an industry or a company means the firm is in a position to fund its core operations with its operating cashflow and hence don’t have to rely on debt market heavily.
Last year, the Oil & Gas-US Exploration & Production industry spent $935 million of capital and earned $1.2 billion of operating cashflow. Eventually, the industry’s free cash flow was recorded at $248 million, 2.3% higher than 2016. Most importantly, the industry recorded negative free cash flow of $601 million during 2015, thanks to weak crude prices, from where free cash flow turned positive to $242 million in 2016.
Declining Debt Load
From mid-2014, the market witnessed free fall in crude prices. Following this, it was difficult for explorers to continue their operations and they had to depend on debt financing. Eventually, the balance sheet of most of the explorers were loaded with huge debt.
But, with the partial recovery in crude prices, both the long-term and current debt load of the Oil & Gas-US Exploration & Production industry fell drastically.
Focus on Oil Explorers
Picking oil explorers seems to be a smart option at this moment. However, selecting winning stocks may be a daunting task.
This is where our proprietary Stock Screener comes in handy. We have narrowed down our search to the following stocks based on a solid Zacks Rank and other parameters.
Headquartered in Midland, TX, Concho Resources Inc. is primarily engaged in exploration activities in the Permian Basin. The company managed to surpass the Zacks Consensus Estimate in the prior four quarters, the average positive earnings surprise being 48.9%. We are also expecting the firm to record earnings growth of 81.3% and 35.5% for 2018 and 2019, respectively.
EOG Resources, Inc. (EOG - Free Report) , headquartered in Houston, TX, has extensive oil and gas reserves spread over Trinidad, China, the United Kingdom, and the United States.
The Zacks #1 Ranked firm posted an average positive earnings surprise of 25.7% for the past four quarters. Also, the firm is expected to see earnings growth of 278.6% and 18.8% for 2018 and 2019, respectively.
Headquartered in Dallas, TX, Pioneer Natural Resources Company (PXD - Free Report) is focused on resources in the United States. The firm beat the Zacks Consensus Estimate in each of the prior four quarters.
This Zacks Rank #1 company will likely post earnings growth of 187.9% and 36.3% for 2018 and 2019, respectively.
Northern Oil and Gas, Inc. (NOG - Free Report) , based in Minnetonka, MN, is mainly involved in upstream activities in the Williston Basin and Bakken play. The company delivered an average positive earnings surprise of 175% over the last four quarters.
The company with a Zacks Rank of 1 will likely see earnings growth of 200% in 2018.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
Image: Bigstock
US Exploration Industry Holds Up Well: 4 Oil Stocks to Buy
The energy sector has always been a key driver of the quarterly outperformance of the S&P 500 index. In the fourth quarter, the index recorded year-over-year earnings growth of 13.5%. However, excluding Energy, S&P 500’s earnings growth was 11.2%. Also, for first-quarter 2018, we expect Energy to surpass all other sectors, posting earnings growth of 65.7%.
Among all the industries belonging to the Energy sector, Oil & Gas-US Exploration & Production seems lucrative with healthy free cash flow and declining debt load. Partial crude price recovery is also a positive for the industry.
Oil & Gas-U.S. Exploration & Production Industry
The firms belonging to this industry are involved in exploration and production of oil and natural gas in prospective resources – like the Permian basin, Eagle Ford, Utica and the Appalachian basin – spread all over the United States.
Operating in this industry needs huge capital spending. The explorers are vulnerable to volatility in oil and gas prices. But, the industry is rewarding too. Partial recovery in oil prices is highly favorable for this industry. From the historical low-mark of $26.21 per barrel hit in February 2016, the West Texas Intermediate (WTI) crude rose beyond the $60 psychological level. The extension of the production cut deal, first signed in late 2016, by the OPEC players through the end of 2018, primarily initiated the rally in crude.
Per the U.S Energy Information Administration (EIA), average WTI crude prices for the first two months of 2018 have been $63.70 per barrel and $62.23 per barrel, respectively. The average monthly oil price had never traded near the $60 per barrel mark since 2015.
The Analysis
There are few parameters that clearly show that investors willing to invest in the energy space should consider this industry.
Industry Rank
In terms of the Zacks Industry Rank, the Oil & Gas-US Exploration & Production industry is among the top performing industries.
The industry is ranked #96 and lies in the top 38% of all industries. The industry has a good industry rank, as the top 50% of the Zacks Ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Decent Upside Potential
We have employed a trailing 12-month Enterprise Multiple for determining the value of the industry. This is because oil energy players typically shoulder significant debt for investing in growth projects and EV includes debt for valuing a company or industry.
Enterprise Multiple = Enterprise Value (EV)/EBITDA
We calculate the current EV/EBITDA value for Oil & Gas-US Exploration & Production industry at 12.99. Although the stock’s current valuation is higher than its five-year median EV/ EBITDA of 6.96, the current value is still lower than its five-year high EV/EBITDA of 16.61, reflecting the industry’s healthy upside potential.
Sufficient Free Cash Flow to Fund Capital Spending
After subtracting capital spending from operating cash flow, we get free cash flow. This is one of the most important parameters when it comes to exploration activities. Positive free cash flow for an industry or a company means the firm is in a position to fund its core operations with its operating cashflow and hence don’t have to rely on debt market heavily.
Last year, the Oil & Gas-US Exploration & Production industry spent $935 million of capital and earned $1.2 billion of operating cashflow. Eventually, the industry’s free cash flow was recorded at $248 million, 2.3% higher than 2016. Most importantly, the industry recorded negative free cash flow of $601 million during 2015, thanks to weak crude prices, from where free cash flow turned positive to $242 million in 2016.
Declining Debt Load
From mid-2014, the market witnessed free fall in crude prices. Following this, it was difficult for explorers to continue their operations and they had to depend on debt financing. Eventually, the balance sheet of most of the explorers were loaded with huge debt.
But, with the partial recovery in crude prices, both the long-term and current debt load of the Oil & Gas-US Exploration & Production industry fell drastically.
Focus on Oil Explorers
Picking oil explorers seems to be a smart option at this moment. However, selecting winning stocks may be a daunting task.
This is where our proprietary Stock Screener comes in handy. We have narrowed down our search to the following stocks based on a solid Zacks Rank and other parameters.
Headquartered in Midland, TX, Concho Resources Inc. is primarily engaged in exploration activities in the Permian Basin. The company managed to surpass the Zacks Consensus Estimate in the prior four quarters, the average positive earnings surprise being 48.9%. We are also expecting the firm to record earnings growth of 81.3% and 35.5% for 2018 and 2019, respectively.
Currently, the firm sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
EOG Resources, Inc. (EOG - Free Report) , headquartered in Houston, TX, has extensive oil and gas reserves spread over Trinidad, China, the United Kingdom, and the United States.
The Zacks #1 Ranked firm posted an average positive earnings surprise of 25.7% for the past four quarters. Also, the firm is expected to see earnings growth of 278.6% and 18.8% for 2018 and 2019, respectively.
Headquartered in Dallas, TX, Pioneer Natural Resources Company (PXD - Free Report) is focused on resources in the United States. The firm beat the Zacks Consensus Estimate in each of the prior four quarters.
This Zacks Rank #1 company will likely post earnings growth of 187.9% and 36.3% for 2018 and 2019, respectively.
Northern Oil and Gas, Inc. (NOG - Free Report) , based in Minnetonka, MN, is mainly involved in upstream activities in the Williston Basin and Bakken play. The company delivered an average positive earnings surprise of 175% over the last four quarters.
The company with a Zacks Rank of 1 will likely see earnings growth of 200% in 2018.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>