Watch Out, Barclays Is Still Negative On E&P Stocks

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  • E&P (oil exploration and production) companies will kick off their third-quarter earnings season on Thursday with Southwestern Energy Company SWN reporting after market close.
  • Thomas Driscoll of Barclays maintained a Negative outlook on the entire sector, noting that his third-quarter EBITDA estimates for Large Cap E&P coverage is on average 2 percent below consensus estimates.
  • Driscoll noted that E&P firms likely slowed their completion activity due to low oil prices in the quarter while fourth quarter volumes may be at risk.
  • Southwestern Energy will officially kick off third-quarter earnings season on Thursday for E&P (exploration and production) energy firms as oil volatility continues to make investors nervous.

    In a report published Wednesday, Thomas Driscoll of Barclays maintained a sector-wide Negative rating, noting that his EBITDA estimates for Large Cap E&P firms is on average 2 percent below consensus estimates. The analyst added that it is likely many companies have slowed their completion activity during the quarter in response to low oil prices while fourth quarter volumes may be at risk.

    Related Link: Goldman's "Holy Grail" Of Renewable Energy

    Driscoll continued that his analysis points to inflated sector-wide valuations, as E&P shares appear to reflect $80 per barrel oil. On an EV to forward debt-adjusted cash flow (EV/DACF) basis, shares are trading at an 8.0x multiple, 33 percent above their historical average (dating back to 1994) and approximately 20 percent above their five-year average. Accordingly, the analyst suggested shares need to decline by 20 to 30 percent "to get to fair value."

    Recommendations

    For investors looking to build a position in the sector, Driscoll recommended owning shares of Canadian Natural Resource Ltd (USA) CNQ – his "most fundamentally undervalued" name, which is trading at a 30 percent discount to its peers. Moreover, the company is transitioning to a "long-lived, low-maintenance and low-decline" production profile which isn't reflected in the "annuity-like character of its asset base." The analyst maintained an Overweight rating and C$35 price target on the Toronto Stock Exchange listed issue.

    Driscoll also highlighted a relative Overweight rating on EOG Resources Inc EOG ($87 price target), Noble Energy, Inc. NBL ($36 price target) and Southwestern Energy ($18 price target).

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    Posted In: Analyst ColorEarningsLong IdeasPreviewsAnalyst RatingsTrading IdeasBarclayse&pOil And ExplorationThomas Driscoll
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