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5 Lagging U.S. Upstream Companies to Turn It Around in Q4

The crash in energy demand engineered by the unprecedented steps to contain the coronavirus hit the Zacks Oil and Gas - Exploration and Production - United States industry hard, whipsawing stocks and futures.

It is not surprising that the industry has lagged the broader Zacks Oil - Energy sector  as well as the Zacks S&P 500 composite so far this year. The industry has declined 49.2% over this period compared with the broader sector’s decrease of 44.5%. In contrast, the S&P 500 has risen 6.2%.

Investors Set for Good Times Ahead

It seems that crude’s worst losses are in the rear-view mirror with signs of gradual rebalancing. Natural gas fundamentals are also expected to improve on lower associated output tied to the brake in shale oil production.

The price of WTI crude — the U.S. benchmark — has come a long way since the depths of minus $38 a barrel in April. Trading just above $40 a barrel, the oil market is expected to be supported by the OPEC+ cuts through the remainder of 2020. Not only is the OPEC+ group continuing to curb output in an attempt to tackle a global supply glut and keep prices afloat, energy companies have significantly scaled back on plans to explore for and bring out more oil. This should lead to lower future production and supply/demand rebalancing.

Meanwhile, U.S. natural gas prices are up more than 75% since late June, when natural gas fell to its lowest level since 1995. Lower year-over-year domestic production and higher LNG prices in Asia and Europe — America’s chief export markets — have contributed to natural gas’ recent strength with the commodity managing to hover around the psychological $2.50 level in the process. Finally, the impending arrival of the winter-heating season is likely to drive up consumption for natural gas and take prices up with it.

Look for Bargain Buys With Strong Fundamentals

The oil and gas price gains will greatly benefit the results of E&P companies for obvious reasons. If investors are eager to lap up opportunities in this market, a prudent move would be to buy the beaten-down stocks with encouraging fundamentals.

To guide investors to the right picks, we highlight five U.S.-based upstream operators that carry a Zacks Rank of #1 (Strong Buy) or 2 (Buy). The Zacks Rank is a reliable tool that helps you to trade with confidence regardless of your trading style and risk tolerance. To learn more about how you can use this proven system for market-beating gains, visit Zacks Rank Education.

Finally, the stocks, which we shall cherry-pick, currently come at a bargain price after declining 45% or more in the first nine months of the year. These have the potential to turn around in the fourth quarter.

The chart below shows the price performance of our five picks year to date.

5 Stocks to Invest In

Laredo Petroleum LPI: This Permian Basin-focused upstream operator currently carries a Zacks Rank #1. Laredo Petroleum banks on its oily, high-margin inventory of assets to tide over the difficult operating environment.

Gulfport Energy Corporation GPOR: The #1 Ranked company's asset base — primarily focused on natural gas — is concentrated on the Utica Shale of Ohio and the SCOOP play in Oklahoma. Gulfport has a combined inventory in excess of 3,000 gross drilling locations in its two primary plays. Robust execution and strong performance should aid Gulfport’s performance going forward.

PDC Energy PDCE: PDC Energy is the second-largest oil producer in the DJ Basin to go with its existing Delaware acreage. The company’s cash flows will also receive some downside protection from oil and gas hedges. PDC Energy has hedged around 70% of its second-half oil production at $58 per barrel. At that price, the Zacks Rank #1 company's hedges are expected to add robust positive value in revenues and considerably soften the blow if there is another meltdown in oil prices.

Murphy Oil MUR: Murphy Oil, carrying a Zacks Rank #2, possesses one of the best upstream portfolios among the domestic oil and natural gas integrated companies and independent E&P group. The company has a target to lower its 2020 G&A expenses by nearly 40% from the 2019 reading and roughly 50% from the 2015-level, which will definitely have a positive impact on its margins.

Parsley Energy PE: Parsley Energy’s core operations are focused on the prolific Permian basin, providing this E&P with an enviable acreage of top-tier assets and a multi-year drilling inventory. While announcing second-quarter results, #2 Ranked Parsley Energy guided toward a minimum free cash flow of $350 million from operations for 2020 if WTI prices average at $35 per barrel for the remaining year. Importantly, this free cash flow view represents an increase of $50 million from the outlook provided earlier, reflecting Parsley Energy’s confidence in its operations.

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Murphy Oil Corporation (MUR): Free Stock Analysis Report
 
PDC Energy, Inc. (PDCE): Free Stock Analysis Report
 
Gulfport Energy Corporation (GPOR): Free Stock Analysis Report
 
Parsley Energy, Inc. (PE): Free Stock Analysis Report
 
Laredo Petroleum, Inc. (LPI): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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