3 Compelling Upstream Stocks With Low Debt Exposure to Buy
With a bullish oil demand growth outlook, upstream companies like Cabot (COG), PDC Energy (PDCE) and Earthstone (ESTE) are likely to witness massive b...
The U.S. upstream energy market currently has a bullish outlook backed by strengthening oil demand recovery, thanks to multiple vaccine rollouts and a grip over the ongoing COVID-19 pandemic. The latest decision of OPEC+ members to increase output as planned further strengthened the bullish momentum that the oil market has gathered. Also, the revision of oil demand growth forecast by their experts for the next year to 4.2 million barrels per day (bpd) from the previous expectation of 3.8 million bpd builds optimism surrounding the oil market.
This marks the perfect time for betting on exploration and production companies. Furthermore, choosing the resilient ones with low or manageable debt exposure, which will provide them with the immunity to navigate through volatile times, is considered prudent.
Let’s delve deeper into the factors driving this industry.
Crude Price Recovery
Owing to coronavirus-induced demand destruction, WTI crude prices plunged to historical lows last year (negative at one point) but witnessed tremendous recovery by year-end. WTI is now on an upswing, with the U.S. benchmark lingering close to $70 a barrel. The easing of lockdown measures has improved the demand outlook amid successful production cut compliance by OPEC+ group members. Rising demand from China, with tea-pot refineries getting back in the business following a crackdown by the government, further supports oil demand growth.
Natural Gas Price to Soar
Natural gas prices have gently risen over the last few quarters. Increasing liquefied natural gas (LNG) exports and domestic demand are driving the prices. The U.S. Energy Information Administration anticipates the Henry Hub spot price to average $3.42 per million British thermal units (MMBtu) in 2021, indicating a significant increase from the 2020 average of $2.03.
Higher commodity prices are boosting the earnings of oil and gas companies like ConocoPhillips COP, EOG Resources, Inc. EOG, and others. The upstream companies’ bottom lines swung to profits in first-half 2021. The stability in prices will likely help them further strengthen their financial situation.
Over the past few years, exploration and production firms have been working tirelessly toward cost reduction, while boosting output. Improving drilling techniques triggered operational efficiencies, enabling the upstream players to decrease unit costs. The COVID-19 pandemic further forced them to adopt a more disciplined capital spending approach. This has likely resulted in better preserving cash flow and a stronger balance sheet.
As the upstream industry is witnessing a market recovery, investors can tap into the profits via smart investment in stocks with strong operations and balance sheet. Companies with a resilient balance sheet can muscle through any market weakness. We have selected three such companies with low or manageable debt exposure, which can provide them with ample financial flexibility. These companies hold a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
3 Stocks to Buy
Headquartered in Houston, TX, Cabot Oil & Gas Corporation COG is an independent gas exploration company with producing properties mainly in the continental United States. Since the majority of Cabot’s production comprises natural gas, the company is well placed to capitalize on the growing clean energy demand. Over the past month, the stock has jumped 11.3%. As higher natural gas prices are likely to boost its profits in second-half 2021, the company is well placed for further growth.
At second quarter-end, Cabot had cash and cash equivalents worth $158.1 million and a total debt of $946.3 million, with a debt to capitalization of 29.2%. Total assets are almost double of total liabilities, reflecting its safety regarding debt payments, a robust financing power and ability to increase stock repurchases. The company is committed to return more than half of its free cash flow to shareholders through dividends and share repurchases.
This Zacks Rank #1 company’s bottom line is expected to rise 220.4% year over year in 2021. It has seen five upward earnings estimate revisions in the past 60 days compared with one in the opposite direction. It beat earnings estimates thrice in the past four quarters, with an average surprise of 15.9%.
Cabot Oil & Gas Corporation Price and EPS Surprise
Headquartered in Denver, CO, PDC Energy, Inc. PDCE is focused on the Wattenberg Field in Colorado and Delaware Basin in Texas. The company’s long-term debt at second quarter-end was $1.2 billion, with a debt to capitalization of 33.5%. It had around $1.7 billion in total liquidity, while its credit facility currently has a total borrowing base of $1.6 billion. PDC Energy’s debt maturity profile is a favorable one, with $200-million convertible notes being the only near-term due in September 2021.
The stock has witnessed a 13.8% jump in the past six months and is likely to grow further. Investors are loving the company’s cash flow generation capabilities. It has lifted its free cash flow generation guidance to more than $800 million for this year, which will further allow it to reduce debt.
This Zacks #1 company’s bottom line is expected to jump 198% year over year in 2021. It has witnessed six upward estimate revisions and no downward movement in the past 60 days. The company beat earnings estimates in all the last four quarters, with an average of 49.1%.
PDC Energy, Inc. Price and EPS Surprise
Earthstone Energy, Inc. ESTE — based on The Woodlands, TX — has a strong upstream portfolio, with assets in the prolific Midland Basin and Eagle Ford. At second quarter-end, the company had only $241.4 million in long-term debt and a total liquidity of around $234.1 million. It had a debt to capitalization of 21.8%.
In first-half 2021, the company generated free cash flow of $60.3 million, up from $30 million in the year-ago period. With the current oil price recovery, the figure is expected to grow further in the second half of the year. The stock has jumped 57.2% in the year-to date period and will likely move higher, given the expected free cash flow growth in the coming days. Investors appreciate its successful integration of the IRM acquisition, and the Eagle Ford and Tracker acquisitions. These moves will likely help the company to grow its production scale and profits.
This Zacks Rank #2 company is expected to witness a 113% year-over-year surge in earnings in 2021. It has seen two upward earnings estimate revisions in the past 30 days compared with none in the opposite direction. Importantly, Earthstone beat earnings estimates thrice in the last four quarters, with an average surprise of 75.5%.
Earthstone Energy, Inc. Price and EPS Surprise
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ConocoPhillips (COP): Free Stock Analysis Report
Cabot Oil & Gas Corporation (COG): Free Stock Analysis Report
EOG Resources, Inc. (EOG): Free Stock Analysis Report
PDC Energy, Inc. (PDCE): Free Stock Analysis Report
Earthstone Energy, Inc. (ESTE): Free Stock Analysis Report
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