Goldman Sachs Explains Why These E&P Names Are Portfolio Musts

Several E&P companies have modestly increased their 2016 hedging protection. As per the 1Q16 results announced so far, E&P firms are now hedged 29 percent for 2016, versus 24 percent in March. This is in line with the average 30 percent seen during 2013–2015, Goldman Sachs’ Brian Singer mentioned in a report.

Singer believes E&P companies are likely to increase their hedging further, given the recent rise in oil prices. He added, “E&Ps are now 10 percent hedged for oil production for 2017E (slightly below average levels post 1Q results), up from 6 percent. We expect this to increase if futures rise.”

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Hedging for natural gas for 2016 has also increased to around 36 percent of expected gas production, near the historical averages.

The analyst pointed out that most companies that are well hedged do not have strong balance sheets. He commented, “We believe producers will initially focus on balance sheet repair before a return to more normal levels of outspending cash flow (10–15 percent in 2017–20E).”

Companies With Best-In-Class Hedge Books

Singer recommended Conviction List Buy rated Pioneer Natural Resources PXD and Buy rated PDC Energy Inc PDCE, saying they had best-in-class hedge books, along with balance sheet strength. The two companies also have solid production growth profiles.

The analyst maintains a positive stance on Buy rated Encana Corp (USA) ECA, saying the company is well hedged and has potential for balance sheet improvement via asset sales and high commodity prices. The company’s focus on deleveraging and core assets is a strength.

Singer also recommended investment in Conviction List Buy rated EOG Resources Inc EOG for its asset quality, returns and flexibility, and Hess Corp. HES for its exploration upside and oil recovery potential.