The ongoing oil and gas price plunge is sure to have an adverse effect on most industry components.
Time to Sell These E&P Plays
While all crude-focused stocks stand to lose from falling commodity prices, companies in the E&P sector are the worst placed, as they will be able to extract less value for their products. In particular, we suggest avoiding exposure to mid- and small-cap E&P players.
In particular, we suggest avoiding exposure to mid- and small-cap E&P plays like EXCO Resources Inc. (XCO – Snapshot Report), Halcón Resources Corp. (HK – Snapshot Report), Bonanza Creek Energy Inc. (BCEI), Rosetta Resources Inc. (ROSE – Snapshot Report) and Oasis Petroleum Inc. (OAS – Snapshot Report). These producers have negative returns year to date and has been witnessing downward earnings consensus estimate revisions for the current quarter and year.
Drillers – Pushed to the Brink by Sinking Oil Prices
As crude price collapse, the top energy companies are expected to cut spending (particularly on the costly drilling projects) on the back of lower profit margins. This, in turn, means less work for the beleaguered drillers that are facing an uphill battle to turn around.
With large, multinational energy firms looking to reign in their skyrocketing capital expenses, the drilling space is likely to see intense competition, as multiple firms chase a single contract. This excess capacity, in turn, could lead to lower utilization or dayrates.
Companies like Helmerich & Payne Inc. (HP – Analyst Report), Nabors Industries Ltd. (NBR – Analyst Report), Parker Drilling Co. (PKD – Snapshot Report) and Patterson-UTI Energy Inc. (PTEN – Analyst Report) look to be in most trouble.
Record Natural Gas Production Keeps Pressure on ‘Gassy Companies'
Looking ahead, EIA expects average total production to rise by 3.1% in 2015, while total natural gas consumption is anticipated to decline next year. We believe these supply/demand dynamics – the projected negative consumption growth in the face of production increase – will weigh on natural gas prices, translating into limited upside for natural gas-weighted companies and related support plays.
