Chicago, IL - August 18, 2016 - Today, Zacks Equity Research discusses the Oil & Gas, part 3, including like HollyFrontier Corp. ( HFC ), Weatherford International plc ( WFT ), Natural Gas Services Group Inc. ( NGS ), Chesapeake Energy Corp. ( CHK ) and ONEOK Partners L.P. ( OKS ).
Industry: Oil & Gas, part 3
Stuck in a long-term bear market, money managers are warning of more pain ahead for energy stocks. In fact, fundamentals - as in ample stockpiles, plentiful refined products and rising production in Iraq and Saudi Arabia - suggest that the odds are firmly stacked against a sustained rally and point toward 'lower for longer' commodity price expectation.
After several industry biggies came out with abysmal quarterly results, some sector observers feel that the door is open for one more retest of the multi-year lows that oil and natural gas fell to in the first quarter.
With no guarantees that things will improve in the near-to-medium term, investors would be better off ignoring the following set of stocks.
Challenging Refining Backdrop Weighs on Downstream Operators
Till recently, U.S. downstream (refining and marketing) stocks were seen notching up healthy gains and earnings beats. This is because the companies use oil as an input from which they derive refined petroleum products like gasoline, the prime transportation fuel in the U.S. Hence, lower the oil price, higher will be their profits.
But with the cost of gasoline, heating oil, and other refined products catching up on the beaten down crude price, crack spreads (or refining margins) are under pressure. This is expected to impact the refiners' near-term profitability.
As per the U.S. Energy Department, the existing stock of gasoline is significantly higher than the year-earlier level and is comfortably above the upper half of the average range. This refers to low demand for the most widely used petroleum product and has cast a deep shadow over the performance of refiners
As a result of these bearish factors, the tendency for a downward estimate revision has been more obvious in recent times. Companies like HollyFrontier Corp. ( HFC ) look to be in most trouble.
E&P Cuts Hurting Oilfield Equipment Suppliers
With new competitors entering the market and shrinkage of capital expenditure spending by the drilling contractors, oilfield machineries and equipment suppliers have seen their pricing fall drastically. In particular, the companies' margins have been hit hard by the ongoing North American drilling slump. The situation - characterized by tepid demand and weak pricing - is not expected to normalize anytime soon.
While firms catering to North American land drillers have been the worst affected, lack of new deepwater drilling orders are starting to haunt the subsea part of the industry. As it is, the commodity price rout has made a number of deepwater drilling projects uneconomical. With contract backlog down, most of the players are facing continued pressure on revenues, earnings and cash flows.
Depressing Prices Make It Difficult for Gas-Weighted Companies
Natural gas has rebounded strongly (by around 60%) since hitting 17-year lows of around $1.6 per million Btu (MMBtu) in the first quarter. The phenomenal run up notwithstanding, the commodity is struggling to reach the psychologically important $3 per MMBtu level. And with expectations of surging supplies in North America amid tepid demand, there appears no reason to believe that the supply glut will subside and natural gas will be out of the dumpster in 2016.
Consequently, natural gas-weighted exploration and production companies like Chesapeake Energy Corp. ( CHK ) are in for a tough time. Gas-focused partnerships like ONEOK Partners L.P. ( OKS ) tend to suffer too, from falling sales for their natural gas liquids (NGL) processing.
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.
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Click here for your free subscription to Profit from the Pros .
Follow us on Twitter: https://twitter.com/zacksresearch
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks Investment Research
800-767-3771 ext. 9339
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report