Meet 125 Mgmt Teams
Equity Research Report Release
Tuesday, October 8, 2019
Energy Industry Report
Summer's End Brings No Relief For Energy Stocks
Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.
Refer to end of report for Analyst Certification & Disclosures
- Energy stocks fell 9% underperforming the overall market by 8% for the second straight quarter. The decline matches the drop in oil prices. Natural gas prices were flat, which is not uncommon for the summer quarter.
- Oil prices fell 9% as two spikes proved to be short lived. Oil prices crossed above $60/BBL twice in response to Persian Gulf tension, but quickly declined when conflicts did not escalate. Oil inventories continue to rise as the U.S. approaches the point of being a net energy exporter. Investor focus has shifted to a slowing global economy.
- A sustained period near $50/BBL could put pressure on energy companies. The long-term futures curve is flat. Hedges are rolling off and companies are being forced to work to lower capital expenditures and operating costs to stay within operating cash flow. Smaller companies with weak balance sheets may face liquidity issues.
- We remain cautious on the group. We favor companies with low debt levels, high hedge positions and low operating costs.
Energy stocks reported another disappointing quarterly as oil prices continued their decline. The XLE Energy Select Sector SPDR Fund fell 9.3% over the three months ended September 30, 2019. This compared to a decline of 1.3% for the S&P 500 Index. This is the second consecutive quarter in which the XLE has underperformed the overall market by approximately 8%. As is usually the case, one need only to look at the performance of oil prices to explain the poor stock performance.
Oil prices, as measured by the WTI November 2019 future price, declined 9.3% from $59.14 per barrel to $53.62 per barrel. The path downward, however, was anything but steady. Oil prices rose sharply in June and again in September to levels above $60 per barrel in response to tension in the Persian Gulf. Higher prices were short lived. Both times, oil prices sank $10 per barrel to a level in the low fifties in the three weeks following the rise. Natural gas prices, as measured by Henry Hub November 2019 futures, were essentially flat rising a modest 0.8% from $2.266 per thousand cubic feet (mcf) to $2.283 per mcf. This is not unusual during the summer quarter when there are few heating degree days.
Oil inventories continue to rise with the EIA reporting consolidated oil stocks of approximately 2 million BBLS (as of 9/27), up 1.7% from a year ago. Of note, domestic production rose approximately 15% year over year and net imports fell 33%. The EIA estimates that the United States could become a net exporter of energy in 2020. Rising domestic production, combined with concerns of a global economic slowdown, seem to be having a bigger impact on oil prices than political tension in the Persian Gulf.
The oil future’s curve is relatively flat at prices near current levels. Many energy companies took advantage of the oil price spikes to add to their hedge positions. For those who didn’t, the opportunity has passed. Longer-term oil prices do not show any relief to producers.
The current outlook for the energy sector remains somewhat negative. Companies are under pressure to lower their operating costs to justify production at $50 per barrel prices. Most companies try to limit expenses to a level within their generated cash flow. With prices down, that means cutting back on operating costs and capital expenditures. A prolonged period at prices near or below $50 per barrel could test the liquidity of companies with burdensome debt levels or high operating costs.
We remain cautious regarding energy stocks. We favor companies with low debt levels, high hedge positions and low operating costs.
All statements or opinions contained herein that include the words "we", "us", or "our" are solely the responsibility of Noble Capital Markets, Inc.("Noble") and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.
This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any security mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not indicative of future results. Noble accepts no liability for loss arising from the use of the material in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to Noble. This report is not to be relied upon as a substitute for the exercising of independent judgement. Noble may have published, and may in the future publish, other research reports that are inconsistent with, and reach different conclusions from, the information provided in this report. Noble is under no obligation to bring to the attention of any recipient of this report, any past or future reports. Investors should only consider this report as single factor in making an investment decision.
This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or discussed to another party, without the written consent of Noble Capital Markets, Inc. ("Noble"). Noble seeks to update its research as appropriate, but may be unable to do so based upon various regulatory constraints. Research reports are not published at regular intervals; publication times and dates are based upon the analyst's judgement. Noble professionals including traders, salespeople and investment bankers may provide written or oral market commentary, or discuss trading strategies to Noble clients and the Noble proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research report.
The majority of companies that Noble follows are emerging growth companies. Securities in these companies involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in Noble research reports may not be suitable for some investors and as such, investors must take extra care and make their own determination of the appropriateness of an investment based upon risk tolerance, investment objectives and financial status.
Company Specific Disclosures
The following disclosures relate to relationships between Noble and the company (the "Company") covered by the Noble Research Division and referred to in this research report.
Noble is not a market maker in any of the companies mentioned in this report. Noble intends to seek compensation for investment banking services and non-investment banking services (securities and non-securities related) with any or all of the companies mentioned in this report within the next 3 months
ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE
Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ 'Best on the Street' Analyst and Forbes/StarMine's "Best Brokerage Analyst.”
FINRA licenses 7, 24, 63, 87
This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for any recipient particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess, or seek advice from their advisors, on whether any relevant part of this report is appropriate to their individual circumstances. If a recipient was referred to Noble Capital Markets, Inc. by an investment advisor, that advisor may receive a benefit in respect of
transactions effected on the recipients behalf, details of which will be available on request in regard to a transaction that involves a personalized securities recommendation. Additional risks associated with the security mentioned in this report that might impede achievement of the target can be found in its initial report issued by Noble Capital Markets, Inc.. This report may not be reproduced, distributed or published for any purpose unless authorized by Noble Capital Markets, Inc..
RESEARCH ANALYST CERTIFICATION
Independence Of View
All views expressed in this report accurately reflect my personal views about the subject securities or issuers.
Receipt of Compensation
No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public
appearance and/or research report.
Ownership and Material Conflicts of Interest
Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.\
|NOBLE RATINGS DEFINITIONS
||% OF SECURITIES COVERED
||% IB CLIENTS
|Outperform: potential return is >15% above the current price
|Market Perform: potential return is -15% to 15% of the current price
|Underperform: potential return is >15% below the current price
NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from "Buy" to "Outperform", from "Hold" to "Market Perform" and from "Sell" to "Underperform." The percentage relationships, as compared to current price (definitions), have remained the same. Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone.
Noble Capital Markets, Inc.
225 NE Mizner Blvd. Suite 150
Boca Raton, FL 33432
Noble Capital Markets, Inc. is a FINRA (Financial Industry Regulatory Authority) registered broker/dealer.
Noble Capital Markets, Inc. is an MSRB (Municipal Securities Rulemaking Board) registered broker/dealer.
Member - SIPC (Securities Investor Protection Corporation)
Report ID: 11091