Rising Earnings On Higher Oil For Shale Stocks

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Includes: APA, CDEV, CHK, CLR, CVX, CXO, ECA, EOG, OXY, XOM, XOP
by: Kirk Spano
Summary

Energy stocks are about to unleash a deluge of earnings.

The oil price rally has been significant and sustained, leading to rising earnings.

The rising earnings for shale stocks should propel a catch-up rally in many issues.

I am adding to certain oil stock holdings ahead of earnings.

MoSI Two months ago, I wrote that The New 'Golden Age' For Oil Stocks Is About To Begin.Since then oil stocks have traded range bound as investors questioned whether oil would sustain prices above $60 per barrel and whether or not companies could capitalize on the higher prices. The rest of this week and next will provide the answers as over a hundred oil companies report earnings.

If my analysis is correct, then we are about to see certain oil companies blowout revenue and earnings, and forecast even higher revenue and earnings growth than expected. This will likely come from the combination of higher realized oil sales prices, both spot and hedged, as well as, efficiencies in drilling, all while global oil demand continues to trend up.

To be sure, a handful of Permian producers will have to tap the brakes on production as they wait until next year for more pipeline and trucking capacity. But, certain shale producers, with a combination of good cost structure, solid balance sheets, smart management and higher realized oil prices are about to light the market on fire. In particular, several companies held within the SPDR S&P Oil & Gas E&P ETF (XOP), which I recommended ahead of Jeff Gundlach and other "gurus," seem ripe for big rallies.

XOP Constituent Earnings

To start, let's take a look at the earnings dates for the top 50 holdings within the SPDR Oil & Gas E&P ETF:

Company Symbol % of Fund Earnings Date
Matador Resources Company (MTDR) 2.259870 Aug 1
Energen Corporation (EGN) 2.087272 Aug 7
Diamondback Energy Inc. (FANG) 2.076480 Aug 7
Cimarex Energy Co. (XEC) 2.068490 Aug 7
Concho Resources Inc. (CXO) 2.067124 Aug 1
Parsley Energy Inc. Class A (PE) 2.048496 Aug 7
SM Energy Company (SM) 1.988964 Aug 1
EOG Resources Inc. (EOG) 1.962664 Aug 2
Callon Petroleum Company (CPE) 1.938066 Aug 6
Gulfport Energy Corporation (GPOR) 1.921947 Aug 1
Apache Corporation (APA) 1.905463 Aug 1
Devon Energy Corporation (DVN) 1.889490 July 31
Carrizo Oil & Gas Inc. (CRZO) 1.864119 Aug 6
Andeavor (ANDV) 1.857893 Aug 6
Noble Energy Inc. (NBL) 1.855434 Aug 2
WPX Energy Inc. Class A (WPX) 1.847026 Aug 1
Antero Resources Corporation (AR) 1.843699 Aug 1
Centennial Resource Development Inc. Class A (CDEV) 1.842045 Aug 6
ConocoPhillips (COP) 1.840210 July 26
Hess Corporation (HES) 1.839345 July 25
Marathon Petroleum Corporation (MPC) 1.833322 July 26
Phillips 66 (PSX) 1.817961 July 27
Southwestern Energy Company (SWN) 1.813808 Aug 2
Anadarko Petroleum Corporation (APC) 1.813308 July 31
PDC Energy Inc (PDCE) 1.811400 Aug 8
Chevron Corporation (CVX) 1.781826 July 27
Marathon Oil Corporation (MRO) 1.774567 Aug 1
Exxon Mobil Corporation (XOM) 1.752297 July 27
Occidental Petroleum Corporation (OXY) 1.746353 Aug 8
Valero Energy Corporation (VLO) 1.737600 July 26
Cabot Oil & Gas Corporation (COG) 1.732696 July 27
Pioneer Natural Resources Company (PXD) 1.721001 Aug 7
HollyFrontier Corporation (HFC) 1.715830 Aug 2
Murphy Oil Corporation (MUR) 1.710250 Aug 8
Newfield Exploration Company (NFX) 1.689962 July 31
EQT Corporation (EQT) 1.678094 July 26
PBF Energy Inc. Class A (PBF) 1.668191 Aug 2
Oasis Petroleum Inc. (OAS) 1.656051 Aug 6
Continental Resources Inc. (CLR) 1.653069 Aug 7
Chesapeake Energy Corporation (CHK) 1.639447 Aug 1
CNX Resources Corporation (CNX) 1.636465 Aug 2
Delek US Holdings Inc (DK) 1.633643 Aug 7
Range Resources Corporation (RRC) 1.611145 July 30
California Resources Corp (CRC) 1.603374 Aug 2
Laredo Petroleum Inc. (LPI) 1.595031 Aug 1
Whiting Petroleum Corporation (WLL) 1.589189 July 31
QEP Resources Inc. (QEP) 1.573093 July 25
Denbury Resources Inc. (DNR) 1.479314 Aug 7
SRC Energy Inc (SRCI) 1.393211 Aug 1
Jagged Peak Energy Inc. (JAG) 1.126288 Aug 8

As you can see, while the fund is named for E&Ps, there is also exposure to some downstream (refining), as well as, midstream (pipeline and storage) companies. For today's purposes, I will be looking at the E&Ps.

Also in the ETF are majors Exxon and Chevron, which I just wrote about negatively in Exxon & Chevron No Longer "Forever" Stocks, which is an important companion piece to this article for a full understanding of my ideas.

The big picture idea that I am monitoring is that oil stock prices should follow the dramatically increasing earnings at many companies focused on shale. Thomson Reuters expects Q2 earnings growth of 144% on a 19.3% increase in revenue for the energy sector. That is huge, yet stock prices have been stalled, presumably, on fears of another oil supply surge.

E&Ps I Am Watching This Week

Interestingly, one of my favorite E&Ps has fallen out of the fund holdings. I have on several occasions recommended Encana (ECA) - "Buy Encana On Maximum Pessimism" is archived at my investment service Margin of Safety Investing - and continue to recommend it.

In short, Encana, which reports August 1st, offers a vastly improved balance sheet from just a few years ago, focus on four key assets, including the Permian, increasing earnings, an increasing dividend and a buyback.

What I expect on Wednesday is that the company will continue to improve on its revenue, free cash flow and earnings growth. As we learned in their recent Permian Update, Encana's takeaway arrangements for the Permian keep it from suffering the wide differentials that some other companies do. This is very important as the Permian is where most outsize growth is coming for shale plays.

My expectation is that Encana beats on all measures. This could propel the stock towards and potentially through $14 per share which it has had a hard time breaking. Analysts have been slow to upgrade Encana which I believe gives it some fuel to run here if they indeed beat.

Also on August 1st are Apache, Concho, Chesapeake, Marathon, Matador and WPX among others. Each has its own expectations, but these are some that I believe could beat significantly to the upside.

Concho, which recently merged with RSP Permian, to become the largest producer in the Permian could see immediate synergies as the companies were making adjustments prior to closing. The stock has been range bound for months and is just coming off a small correction. I believe it could break to new highs.

Apache is not getting any love from analysts recently as it continues to retrench its business. Their revenue estimate is for $1.77 billion in revenue, up from $1.38 billion last year.

Chesapeake Energy, much maligned the past few years, has started to rally. It's recent sale of Utica assets more fully positions it in the short and intermediate term as an oil play, even if their long-term still seems to be natural gas. As I discussed in this interview with Forex Analytix, I own calls on Chesapeake and believe they will once again offer hope for a more full rebound.

Marathon, Matador and WPX I do not follow closely, however, I will take their results as a harbinger for similar stocks.

On August 2nd a lot of investors will be watching EOG Resources. It is not getting much love from analysts despite their very low cost of production. Analysts fear the developing Permian takeaway bottleneck will hamper production. Investors haven't seemed too worried and have rewarded EOG this year with roughly a 19% gain. We'll see which way things go.

E&Ps I Am Watching Next Week

Centennial Resource Development, Mike Papa's company (formerly of EOG), might be the most interesting stock to hear from on Monday. Papa has warned on the Permian takeaway issue, but also said that Centennial's unhedged approach would benefit the company. I tend to agree that the unhedged companies could be in for big jumps in earnings.

On Tuesday we get Harold Hamm's Continental Resources which is also largely unhedged right now. Citigroup downgraded Continental in May and the stock has not done well since. In Continental's preliminary production report on July 24th, they reported 25% growth versus a year ago. With higher realized prices the earnings should improve dramatically. Will the stock price follow?

Also Tuesday is the "Mother Fracker" themselves, Pioneer Natural Resources. The company continues to focus on the Permian and has noted that contracts for takeaway to the Gulf Coast are insulating it from steep differentials. Said CEO Timothy Dove earlier this year: "Our oil contracts to the Gulf Coast not only expose us to Brent-related pricing, but also insulate us from the recent widening of the Midland-Cushing oil price differential... Pioneer’s firm transportation contracts for gas provide flow assurance, with more than 75% of our production being sold in Southern California."

I believe that Pioneer, which is off of its highs by 15%, could see a rally back to those levels, setting up a breakout in coming months.

On August 8th, Occidental Petroleum reports. I have been touting this stock since it was around $60 per share. I believe its increasing production and shopping of enviable midstream assets bode well for this Permian heavy producer. Estimates of what it could receive for the midstream assets are around $5 billion. For a company with total long term debt of only $10.31 billion and a market cap of $63 billion, this is my favorite dividend growth stock in the space.

What I Am Buying

I am buying additional shares of Encana, Chesapeake Energy, Centennial Resources, Continental Resources, Pioneer Natural Resources and Occidental Petroleum. I see that basket as likely to catch up to the rally that EOG and the price of oil have seen.

I am also considering Concho, but do not believe I have the time to get in before earnings as I need to read up a bit more. I will listen to their earnings call and decide if I'd like to add it to the group. I suspect I will.

Members of Margin of Safety Investing have been reading about these companies for some time now. They have received a companion piece for this article which contains several option swing trades that I believe will augment our stock and LEAP positions.

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Disclosure: I am/we are long CDEV, CHK, CLR, ECA, OXY, PXD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a Registered Investment Advisor - <span title='bluemoundassetmanagement'>bluemoundassetmanage...</span>.com - however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.