Citi More Bullish On E&P Stocks En Masse

• E&P stocks declined about 40 percent, on average, through 2015, significantly underperforming the S&P 500.
• Citi's Robert S. Morris believes that an eventual upturn in oil prices could prove to be a positive catalyst for the E&P sector in 2016.

Analyst Robert Morris mentioned that stock performance in the E&P sector would continue to mirror the direction of oil prices, although in the near term, oil prices are likely to be impacted by Iran increasing production, as well as limits on storage capacity.

"Materially Better" 2016

However, the second half of 2016 is expected to be "materially better," with a more balanced global oil market expected by end-2016. "Thus, after sharply trailing the S&P 500 for two consecutive years, we see the tide turning for the E&P sector in 2016," Morris stated.

While Morris estimated that Citi's E&P coverage universe reflects "normalized" oil and natural gas prices, on average, of $54/Bbl and $2.60/MMBtu, there could be significant upside from the current levels, with the stocks potentially trading at 85 percent of Citi’s full resource NAVs.

"But given the much warmer-than-normal start to the winter, we are also lowering our 2016 composite spot natural gas price forecast to $2.50/MMBtu from $3.00/MMBtu," Morris mentioned.

Related Link: Exploring Volatile Side Of The E&P ETF Trade

Prices Determine Stock Performance

According to the Citi report, for the first time in more than a decade, the per share debt-adjusted growth metrics within the E&P sector showed no correlation to the share price performance in 2015. The debt metric and natural gas price expectations determined the share price performance instead.

"Looking ahead though, without a further collapse in commodity prices, we believe debt-adjusted growth metrics, along with key debt metrics and the ability to increase production by spending within cash flow, will drive relative E&P share performance," the report added.

Capital Spending To Decline

Morris expects total capital spending to decline by 26 percent in 2016, following a 32 percent decline in 2015.

On the other hand, total oil production is expected to continue to rise, with the total reported aggregate production for the Citi's E&P coverage universe estimated to be up less than 1 percent in 2016 and total aggregate organic crude production rising 4 percent year over year.

Upgrades

Analyst Robert Morris upgraded the rating on Anadarko Petroleum Corporation APC, Canadian Natural Resource Ltd (USA) CNQ, EOG Resources Inc EOG and Cimarex Energy Co XEC from Neutral to Buy.

The target price was lowered from $76 to $62 for Anadarko Petroleum, from $26 to 25 for Canadian Natural Resources and from $125 to $110 for Cimarex Energy. The target price for EOG Resources was maintained at $88.

Buy Maintained

Morris maintained a Buy rating on Antero Resources Corp AR, Apache Corporation APA, Concho Resources Inc CXO, Memorial Resource Development Corp MRD, Range Resources Corp. RRC and Whiting Petroleum Corp WLL.

The target price was lowered from $30 to $28 for Antero Resources, from $60 to $54 for Apache, from $128 to $109 for Concho Resources, from $22 to $20 for Memorial Resource, from $40 to $30 for Range Resources and from $25 to $20 for Whiting Petroleum.