On August 11, The Wall Street Transcript interviewed Scott Hanold, Director and Senior Analyst, Energy Research at RBC Capital Markets located in Minneapolis. Excerpts below detail his outlook for Natural Gas E&P companies.
TWST: Where should investors go now?
Mr. Hanold: That's a big question. Where is the next big shale play? You need to watch — several shale plays are being talked about by the industry like the Utica, Pierre and Pearsall, but we will see what happens there. Ultimately, I think what you should do is focus on stocks right now that have some leverage to one of the emerging shale plays and where valuation still provides you with upside.
Specifically, we like Equitable Resources (EQT), which is drilling in Appalachia. We should hear results on a few emerging plays including the Utica shale, which could really open up a lot of potential for that company and industry.
TWST: You are going back to Pennsylvania where the whole thing started?
Mr. Hanold: That's exactly right; we're coming full circle now 100 years later.
TWST: Equitable is one of the names you like?
Mr. Hanold: Equitable Resources is a stock we recommend. Another one is Penn Virginia (PVA). Penn Virginia has exposure to most of these emerging shale plays; the Haynesville is the biggest area of leverage for them. They also have acreage in both the Marcellus and Lower Huron Shales and are a player in the Bakken, Woodford and Fayetteville Shales. So they have basically got exposure to all the emerging shale plays and I think the stock looks very attractive on a fundamental basis. And there is a lot of upside over the next year.
TWST: How does a company like that get a hand in all these places?
Mr. Hanold: I think what they've done is proactively watch these plays and as they have seen them develop, they come in and pick up acreage that looks prospective or could potentially be over time as the areas develop. This happened in the Bakken, where activity moved toward the company's acreage holdings.
TWST: The right place at the right time?
Mr. Hanold: Yes. But you have to look forward, you have to watch industry activity, do your own research and know where to make your bets and I think they did a very good job of that.
TWST: Is there a third name?
Mr. Hanold: A third name would be Southwestern Energy (SWN). Their dominant position in the Fayetteville Shale provides significant upside potential even above what's being valued in the marketplace today. The Fayetteville Shale is not the only thing Southwestern is doing, so we could see other project they have like the James Lime and Marcellus Shale become more meaningful as they start drilling.
TWST: So they are well positioned in a variety of places?
Mr. Hanold: Yes, they are focused mainly in Fayetteville where there is a lot of upside, but they've got a couple of ancillary positions that add nicely to the upside as well.