When a company in any sector is downgraded, such an action tends to result in a sell-off unless there is significant news countering such behavior. On Friday, November 2nd, two companies within the energy sector were downgraded and, as a result, I wanted to examine each firm a bit further in an attempt to find the proverbial silver lining for long-term investors.
Fluor (NYSE:FLR) - The Irving, Texas-based firm which "provides engineering, procurement, construction, maintenance, and project management services worldwide," reported pretty dismal Q3 Earnings ($0.86/share vs. estimates of $0.96/share) on Thursday and as a result was downgraded from 'Outperform' to 'Neutral' by Robert W. Baird on Friday. The firm noted, "in addition to FLR's disappointing Q3 the expected pick-up in activity levels appears to have been pushed to the right, with backlog likely to trend lower as mining projects burn off."
Is there a silver lining in terms of Fluor? The silver lining comes in the form of a short strategy. If the company continues to demonstrate a downward trend in the number of mining projects over the next 12-24 months, I'd look to actually short the stock at current levels. By shorting the stock at around $53/share, I'd look to cover my short at between $42.50/share and $44/share, for roughly a $9/share profit. I think the downward potential is much greater than the upside potential, even though the company raised the lower-end of its full year EPS estimates by $0.10/share.
Pioneer Natural Resources (NYSE:PXD) - The Irving, Texas-based firm which "operates as an independent oil and gas exploration and production company in the United States and South Africa," was downgraded from 'Buy' to 'Hold' by Canaccord on Friday. The firm noted that they "are lowering our rating to HOLD and reducing our target price $4 to $111 per share due to higher operating and production tax expense. Our target price anticipates the sale of the Barnett Combo assets for $500-$600 million though it does not include the full value potential of a joint venture of the southern 200,000 net acres of the Spraberry field targeting the Wolfcamp shale."
Is there a silver lining in terms of Pioneer Natural Resources? For potential investors looking to establish a position in PXD, I think the silver lining associates itself with the sale of the Barnett Combo. If the sales comes in where Canaccord expects it to (the $500-$600 million range), the stock shouldn't move much in either direction (+/- 2%). If the sale of the Barnett Combo is prolonged, and comes in 5% - 10% lower than estimates are calling for, I'd look to establish a short position at $105/share and look to cover that short at any point under the $97.50/share level. If, on the other hand, the Barnett Combo sells for a price above projected estimates, I'd look to establish to a long position at current levels, and begin to take profit if and when the stock surpasses the $112/share level.