The persistent weakness in the oil and gas market following low commodity prices for an extended period of time saw the shares of most of the major energy players tumbling to all-time lows. However, the business scenario seems to be changing as commodity prices are moving north.
Hence, this appears to be the most appropriate period for investors to focus on energy stocks with good fundamentals and potential to gain in 2017.
Will Oil & Gas Prices Remain Strong this Year?
The prolonged spell of crude price weakness seems to be over as the energy market is ultimately witnessing improvement in oil prices. Looking back, the major oil producing nations were trying to capitalize on the opportunities that opened up during mid-2014, when oil was trading above $100 per barrel.
These countries started to produce more and more oil as the commodity could be sold at higher prices. In fact, the last two and half years saw OPEC, Russia as well as U.S shale players vying for production share and increasing output substantially.
However, matters took a turn for the worse when a supply glut resulted in crude prices plunging to the rock bottom. Last February, prices nosedived to a low of $26 per barrel, thanks to the boom in shale oil production and rising output from OPEC. The downturn prompted several analysts to make projections about a potential bottom. While some suggested prices might drop as low as $20 a barrel, other came up with estimates of as low as $10 per barrel.
Nonetheless, the historic production cut agreement by OPEC and non-OPEC producers and decreasing investments (in existing and new wells) have seen oil prices more than double from the Feb 2016 lows to above $50 per barrel level. In fact, the U.S. Energy Information Administration (EIA) projects West Texas Intermediate (WTI) crude to remain an average of $52 per barrel for 2017.
As was the case with crude, natural gas production from the major shale plays too remained strong and the demand for the commodity failed to keep pace with the oversupply. As a result, natural gas prices slipped to 17-year lows of around $1.6 per million British thermal units (MMBtu) in the first quarter 2016. The supply glut woes were compounded by lackluster industrial requirement in the past few years.
However, successive below-average builds on the back of warmer temperature across the country followed by the start of the withdrawal season, has been cutting into the year-over-year storage surplus. Hence, natural gas prices have rebounded strongly and doubled from the extreme lows it hit in last March. The dramatic recovery has helped the commodity stay above the key psychological level of $3 per MMBtu. EIA also projects 2017 natural price to be $3.55 per MMBtu, which is much higher than $2.51 per MMBtu in 2016.
Energy Stocks Poised to Gain
Oil and gas prices are the most important determinants of the fate of energy companies. The exploration and production companies will be able to sell the commodities at higher prices and hence, could be able to lower their huge debt burden. In fact, oil patches in the U.S. are witnessing the comeback of oil and gas majors since the last several weeks.
We believe that increased production will be lead to higher need for transportation and storage activities. This, in turn, could generate significant cash flows for midstream players.
How to Make the Best Choice?
As discussed above, the current market conditions seem to be favorable for investing in energy stocks. However, making the right investment decision is by no means an easy one. This is where our VGM score comes to the rescue. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. This allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on a Zacks Rank #1 (Strong Buy) or 2 (Buy) and VGM score of A or B.
Headquartered in Dallas, TX, Matador Resources Company MTDR is involved in exploration, production and acquisition of oil and gas properties in the U.S. The company with VGM Score of B currently carries a Zacks Rank #2, implying that the stock will outperform the broader U.S. equity market over the next one to three months.
Matador Resources also surpassed the Zacks Consensus Estimate in each of the last four quarters with an average earnings beat of 250.51%. For 2017, the Zacks Consensus Estimate for the company was revised upward to 76 cents from 66 cents, over a period of 60 days,.
Noble Midstream Partners LP NBLX – based in Houston, TX – is the operator and owner of midstream assets in the U.S. The partnership flaunts a Zacks Rank #1, implying that the stock will significantly outperform the broader U.S. equity market over the next one to three months. You can see the complete list of today’s Zacks #1 Rank stocks here.
The partnership has VGM Score of B and witnessed a positive earnings estimate revision for 2017 over the last 60 days.
Based in San Antonio, TX, Tesoro Logistics LP TLLP is the operator of logistic assets in the U.S. Over a period of 60 days, the partnership’s earnings estimates for 2017 have been revised higher. The partnership carries a Zacks Rank #2 and VGM Score of B.
France-based TOTAL S.A. TOT, previously known as TOTAL Fina Elf S.A., is among the top five publicly traded global integrated oil and gas companies based on production volumes, proved reserves and market capitalization.
The company has VGM Score of B and Zacks Rank #2. For 2017, TOTAL’s earnings estimates have been revised upward over a period of 60 days.
CONE Midstream Partners LP CNNX – based in Canonsburg, PA – is an energy player with extensive midstream asset bases.
The partnership – with Zacks Rank #2 and VGM Score of A – saw positive earnings estimate revisions over the last 60 days.
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