The oil cartel known as OPEC (Organization of the Petroleum Exporting Countries) has had a long-simmering feud with shale gas stocks. Once they were the uncontested source of fossil fuel-based energy, but shale gas upended that preconception. For example, because of the shale gas revolution, the U.S. is forecasted to become “the world’s biggest supplier of liquefied natural gas” by the year 2035. Remarkably, U.S. exports only started last year.
Not wanting to give an inch, OPEC, led by Saudi Arabia, aggressively targeted American shale gas stocks in 2014. Amid hemorrhaging crude oil prices, OPEC went against everything taught in economics 101 — they increased supply. The point, of course, was to squeeze out as many competitors as possible, many of which were higher-priced producers. OPEC would take a beating in the short run, but would later exercise long-term control of the energy markets.
Or so that was the plan. Initially, things were looking great for Saudi Arabia and company. According to Bloomberg, more than a hundred shale gas companies folded since January of 2015. There was no way that small, independent producers could stand up to the Middle Eastern conglomerate. But by eliminating the chaff, OPEC now faced a concentrated and emboldened opponent.
Indeed, efforts to stymie the shale gas industry and the gas stocks listed in the sector may have actually helped American producers. First, domestic competition is nominally down — always a good thing when you’re in the thick of it.
Second, the survivors among the gutted shale gas stocks have learned to live off meager circumstances. They’ve cut where they needed to cut, and have taken risks when appropriate.
But most importantly, many shale gas operators have done the best thing they could possibly do — hedge their bets. When oil prices fell to insane levels, the bold locked in their future returns for most of this decade. Unless crude were to fall back to the prior bottom and stay there indefinitely, shale gas stocks are actually well-positioned.
That’s terrible news for OPEC, but what comes around, goes around. Here are three shale gas stocks that will win big, whether OPEC likes it or not.
Shale Gas Stocks That Will Win: EOG Resources (EOG)
What do Bank of America, Tudor Pickering, and Stifel have in common? These names among several other analyst firms have all bumped up their ranking of EOG Resources Inc (NYSE:EOG). In fact, over the past four months, no major investment company has downgraded EOG stock. The last bearish note came from Societe Generale in early October of 2016. Other than that, it has been clear skies for EOG.
One has to wonder what makes EOG Resources so special in light of a volatile environment for gas stocks. The answer is efficiency. In the depths of the energy and commodity crisis, producers were left with a stark choice: adapt or die. Fortunately for shareholders, EOG took the former step.
Rather than focus on quantity, EOG focused on quality. This meant reexamining their business structure and performing an overhaul. Profitable assets were developed further. Underperforming assets were cut. As stated in the EOG website, “We weren’t going to bank on a recovering commodity price to drive capital investment returns in 2016.”
Today, the company is in a much healthier position. Ironically, the oil collapse and the subsequent OPEC attack gave EOG the motivation to kick their organizational discipline into high gear.
Shale Gas Stocks That Will Win: RSP Permian (RSPP)
Like EOG Resources, RSP Permian Inc (NYSE:RSPP) has received a lot of love from the markets. Last December, RSPP stock was moved up to a “buy” recommendation by analyst firms Guggenheim, JP Morgan and Morgan Stanley. The main difference between RSPP and EOG is that the former is overwhelmingly supported by financial experts.
Of the 31 firms covering RSPP stock, 19 maintain a “buy” recommendation, while nine have a “strong buy” ranking. Essentially, more than 90% of covering analysts are optimistic about the oil and shale gas producer’s future. Even more remarkable is the fact that RSPP isn’t exactly a winner this year. Shares are down nearly 13% from its January opener. At the same time, analysts have refused to budge from their bullishness while the stock price trended down.
Why? Zacks Equity Research believes that this is a case where public investors have not fully absorbed shifting fundamentals. For RSPP, analysts have jumped their estimates for the current fiscal year by a margin of more than 42%. That’s heady stuff, but it’s not yet reflected in the markets. For whatever reason, RSPP is flying under the radar.
Given the positively changing dynamics within shale gas stocks, this is not going to last forever. Picking up RSPP now could turn out to be an extremely shrewd maneuver.
Shale Gas Stocks That Will Win: Anadarko Petroleum (APC)
Among our list of shale gas stocks, Anadarko Petroleum Corporation (NYSE:APC) is the most speculative opportunity. A comparative look at the analyst recommendations will quickly confirm this sentiment. Since early December, two analysts have upgraded APC, while two have downgraded it.
What gives? Certainly, technical underperformance doesn’t help matters. Bearishness tends to beget further bearishness, which has dogged APC stock. Year-to-date, shares are down more than 11%. Worryingly for investors, APC is flirting with its 200-day moving average. If it breaks below that point, Anadarko could be facing a long 2017. Also, APC has given up most of its “Donald Trump rally” — it’s only up 2% from Nov. 8.
But as is the case for so many surviving gas stocks, tough times have hardened APC into a well-oiled machine. True, the company isn’t turning a profit yet. But look at its financials — APC has sharply cut down on its expenses. As a result, the red ink in operating and net margins have improved to a more workable rate. In addition, free cash flow has finally entered into positive territory.
Granted, investors will have to see beyond the tape to justify APC stock; hence, the speculation. Still, if you want to make a smart risk, Anadarko is a prime candidate.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.