Market Overview

Goldman Sachs Ratings A Pair Trade?

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Goldman Sachs provided commentary on the natural gas industry by upgrading Range Resources (NYSE: RRC) to Buy and downgrading Southwestern Energy (NYSE: SWN) to Neutral.

With similar market caps, this rating combination has the potential for a pair trade. In addition, Southwestern Energy has significantly outperformed the benchmark SIG Oil Exploration & Production (NASDAQ: EPX) this year, while Range Resources has slightly underperformed.

Range Resources was up 1.02 percent on the Goldman Sachs upgrade. Goldman Sachs likes the company because it feels the market is too generally discounting natural gas. The note states, “we believe select producers can realize much lower differentials due to better geographical positioning or because they were early is signing beneficial contracts.”

Related: Rackspace Analyst Roundup

The note further explains that upstream investors are likely to enter positions because Range’s contracts will allow for relatively cheap growth.

Goldman Sachs’ $110 price target (23.2 percent upside) assumes Brent is worth $100/bbl, $4.5/MMBtu Henry Hub gas and a 15 percent probability of a $125 take out.

When analysts put Neutral ratings on stocks it can be hard to tell exactly what they mean. Because the banks do not want to risk potential investment banking revenue by damaging relations with a Sell rating, Neutral very well may mean Sell.

The Goldman Sachs note says, “Marcellus prices may be a greater headwind than tailwind. Going forward we see potential headwinds from greater volatility for SWN’s Marcellus price realizations relative to peers. We anticipate greater near-term volatility in realizations for NE Marcellus producers relative to SW producers.”

Along with lowering the company to Neutral, the analysts reduced the price target from $58 to $51. This is 8.6 times 2015 earnings and 8.1 times EV/EBITDA. Shares of Southwestern Energy were down 1.06 percent on the downgrade.

Both stocks have seen a slight bounce back throughout Thursday's trading.

Latest Ratings for RRC

DateFirmActionFromTo
Dec 2014BarclaysUpgradesUnderperformEqual-weight
Dec 2014Deutsche BankMaintainsHold
Dec 2014Imperial CapitalMaintainsOutperform

View More Analyst Ratings for RRC
View the Latest Analyst Ratings

Posted-In: Goldman SachsUpgrades Downgrades Analyst Ratings Trading Ideas

 

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