Market Overview

Oil Slide Fallout Continues; Devon Energy, ConocoPhillips Downgraded

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Oil Slide Fallout Continues; Devon Energy, ConocoPhillips Downgraded

The summer driving season is in full swing, but oil prices have not budged. A bearish undertone is evident in the crude oil space; after starting the year around mid-$50 levels, the "black gold" has come off significantly and is currently around the mid-$40 levels.

Twin Downgrades

Against this backdrop, Bernstein downgraded shares of Devon Energy Corp (NYSE: DVN) and ConocoPhillips (NYSE: COP) to Market Perform, attributing the action to the substantial reduction to its oil price deck.

Diversification To Hurt ConocoPhillips

Analyst Bob Brackett is of the view that those companies without strong catalysts are unlikely to outperform in a flat commodity price environment. Specifically, on ConocoPhillips, the analyst said the downgrade stems from two factors, namely the diversified nature of its portfolio and its more muted growth prospects.

The analyst now models strong growth in U.S. onshore, particularly the Permian, while he expects flattish supply elsewhere. Therefore, the analyst recommends those names highly levered to the U.S. onshore, rather than more diversified names such as ConocoPhillips.

3 Reasons For Devon Downgrade

Meanwhile, Bernstein expects Devon to be hit by oil sands, which would be a drag on the portfolio in a continued low-price environment. The firm also thinks the company's growth would be slower than the fastest growers in the sector (see Brackett's track record here).

Additionally, the firm said, "In the context of the industry-wide productivity improvements, Devon' s respectable type curve and resource upsizing catalysts may not be sufficiently lower than par for the course."

The firm, however, retained its Market Perform rating on Cobalt International Energy, Inc. (NYSE: CIE) and Encana Corp (USA) (NYSE: ECA).

Bernstein also maintains its bearish gas positioning.

Quality, High-Beta And Expensive E&Ps In Favor

On the other hand, the firm said it maintains its Outperform rating on EOG Resources Inc (NYSE: EOG) and Pioneer Natural Resources (NYSE: PXD), which are high quality, low beta and expensive E&Ps. The firm expects these companies to grow substantially within cash flow at its $48 oil price deck for the next 18 months.

Catalysts: Key To Outperformance

The firm also maintains its Outperform rating on companies with strong operational or resource-related catalysts.

Accordingly, the firm has Outperform rating on Apache Corporation (NYSE: APA), which would benefit from Alpine High Well data and production boost. and Anadarko Petroleum Corporation (NYSE: APC).

Concluding, the firm said, in an extended $48 WTI environment, only the lowest cost E&Ps will be able to grow at a robust rate within cash flow. Therefore, the firm advised E&P investors to focus on the few that can demonstrate robust growth at sub-$50 prices, since growth and returns are identical for firms, which reinvest 100 percent of cash flow.

At Last Check

  • Apache was down 4.2 percent at $45.65.
  • Anadarko was down 2.81 percent at $43.54.
  • Cobalt was down 5.93 percent at $2.22.
  • ConocoPhillips shares were down 2.13 percent at $43.22.
  • Devon was down 3.23 percent at $30.09.
  • Encana shares were down 0.93 percent at $8.50.
  • EOG Resources was down 2.05 percent at $88.45.
  • Pioneer Natural Resources shares were down 1.82 percent at $156.51.

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Posted-In: Analyst Color Long Ideas News Downgrades Price Target Commodities Reiteration Markets Best of Benzinga

 

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