Zacks Industry Outlook Highlights: Halliburton, Schlumberger, Weatherford International, Royal Dutch Shell and Chevron

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Chicago, IL - December 22, 2015 - Today, Zacks Equity Research discusses the Oil & Gas (Part 1), including Halliburton Co. ( HAL ), Schlumberger Ltd. ( SLB ), Weatherford International plc ( WFT ), Royal Dutch Shell plc ( RDS.A ) and Chevron Corp. ( CVX ).

Industry: Oil & Gas (Part 1)


Crude Oil

The free-fall in oil prices have made 'energy' the most talked-about sector of the entire market in 2015, apart from the fact that its performance has been the worst. Year-to-date, 'The Energy Select Sector SPDR' has posted a loss of 26%. On the other hand, the broad-based Dow Jones Industrial Average and the S&P 500 index shed just 4% and 3%, respectively, over the same period.

As of now, crude prices are trading below the key psychological level of $35-a-barrel after hitting a new 7-year low of $34.29 recently. This, despite a short spike that saw the commodity scale a year-high of $61.43 per barrel in June.

Oil is facing the heat on several fronts. Perhaps most important pertains to the mounting worries about China's crude demand. In particular, the Asian giant's currency devaluation has stoked speculation about soft economic growth in the world's No. 2 energy consumer.

What's more, in the absence of production cuts from OPEC, the resilience of North American shale suppliers to keep pumping despite crashing prices, and a weak European economy, not much upside is expected in oil prices in the near term. Moreover, a stronger dollar - edging even higher after the Fed policy makers unanimously voted to raise interest rates - has made the greenback-priced crude more expensive for investors holding foreign currency. The Iranian nuclear framework agreement, which has the potential to release more of the commodity in the already oversupplied market, has put the final nail in the coffin.

As it is, with inventories near the highest level during this time of year in 80 years at least, crude is very well stocked. On top of that, OPEC members (like Saudi Arabia) have made it clear time and again that they are more intent on preserving market share rather than attempting to arrest the price decline through production cuts. Therefore, the commodity is likely to maintain its low trajectory until the first half of 2016.

This has forced the oil companies and associated service providers to make deep cost cuts by reducing their workforce. Oilfield services behemoths like Halliburton Co. ( HAL ), Schlumberger Ltd. ( SLB ) and Weatherford International plc ( WFT ) were the first to respond to the worsening situation, announcing substantial redundancies earlier in the year. Of late, they have been joined by integrated majors including Royal Dutch Shell plc ( RDS.A ) and Chevron Corp. ( CVX ).

In the medium-to-long term, while global oil demand will be driven by China - which continues to be the main catalyst to liquids consumption growth despite the current slowdown - this will be more than offset by sluggish growth prospects exhibited by Asian and the European economies.

In our view, crude prices in the next few months are likely to exhibit a sideways-to-bearish trend, mostly trading in the $40-$50 per barrel range. As North American supply remains strong and demand looks underwhelming, we are likely to experience pressure to the price of a barrel of oil.

Natural Gas

"It's cleaner, it's cheaper and it's domestic."

- Legendary energy entrepreneur T. Boone Pickens, in reference to natural gas.

Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of 'shale gas' - natural gas trapped within dense sedimentary rock formations or shale formations - has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world's largest energy consumer.

With the advent of hydraulic fracturing (or "fracking") - a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals - shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves. As a result, once faced with a looming deficit, natural gas is now available in abundance.

Statistically speaking, the current storage level - at 3.846 trillion cubic feet (Tcf) - is up 541 Bcf (16.4%) from last year and is 322 Bcf (9.1%) above the five-year average. Expectedly, this has taken a toll on prices. Natural gas peaked at about $13.50 per million British thermal units (MMBtu) in 2008 but recently dropped to its lowest level in almost 17 years - at $1.684 per million Btu (MMBtu). Apart from plentiful stocks, which hit an all-time high in November, the selloff has been spurred by predictions of tepid demand for the heating fuel due to mild weather spurred by the El Niño phenomenon.

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HALLIBURTON CO (HAL): Free Stock Analysis Report

SCHLUMBERGER LT (SLB): Free Stock Analysis Report

WEATHERFORD INT (WFT): Free Stock Analysis Report

ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report

CHEVRON CORP (CVX): 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.

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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