Rising energy prices have lately delivered significant returns for oil & gas producers. However, despite optimistic price expectations, uncertainty reigns in the forward market. And it will likely take a while for U.S. independent producers to reverse the supply cuts implied last year and to operate at their pre-pandemic capacity. A senior equity analyst at Siebert Williams Shank & Co., Gabriele Sorbara expects U.S. shale oil companies to remain in "maintenance mode" regarding drilling and completing new wells.
Furthermore, producers signed contracts at much lower oil prices to hedge against the negative oil prices last year. Drilling budgets need to increase 54% to more than half a trillion dollars to avoid a future supply crisis. Recently, President Biden’s administration had called on OPEC to increase supply and asked for cooperation from oil companies to curb price increases.
Given the uncertainties surrounding the oil market, we believe fundamentally weak stocks with bleak long-term prospects, Northern Oil and Gas, Inc. (NOG) and Genesis Energy, L.P. (GEL), are best avoided now. Analysts have recently downgraded these stocks.
Northern Oil and Gas, Inc. (NOG)
NOG is a Wayzata, Minn.-based energy company that acquires, develops, explores, and produces crude oil and natural gas in the United States. The company operates primarily in the Bakken and Three Forks rock formation in the Williston Basin in North Dakota and Montana.
The stock’s rating has been downgraded by BofA Securities, Inc. from a ‘buy’ to a ‘neutral.’
On October 7, NOG agreed to acquire non-operated interests in Williams, McKenzie, Mountrail, and Dunn Counties in North Dakota. The company intends to fund the acquisition with cash on hand and operating free cash flow, which could mean a considerable cash outflow.
In the second fiscal quarter, ended June 30, NOG’s revenue came in at $24.81 million, up from its negative year-ago value. However, its production expenses increased 60.3% year-over-year to $42.70 million. In the six months ended June 30, its net cash provided by operating activities decreased 16.5% from the same period last year to $168.95 million.
The stock has declined 7.1% in price over the past five days and 1.4% intra-day to close yesterday’s trading session at $24.83.
NOG’s bleak prospects are reflected in its POWR Ratings. The stock has a Value and Stability grade of D. Within the 11-stock Energy – Drilling industry NOG is ranked #3. This industry is rated F. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Click here to see the additional POWR Ratings for NOG (Growth, Momentum, Sentiment, and Quality).
Genesis Energy, L.P. (GEL)
GEL in Houston, Tex., operates as a midstream oil and gas company and functions through the segments of Offshore Pipeline Transportation; Sodium Minerals and Sulfur Services; and Onshore Facilities and Transportation.
GEL’s rating has been downgraded by analysts at Barclays PLC (BCS) from an ‘overweight’ to an ‘equal weight.’
For its second fiscal quarter, ended June 30, GEL’s revenue increased 29.7% year-over-year to $503.86 million. However, its cost of sales and operating expenses went up 40.3% from the same period last year to $397.87 million. And its available cash before reserves declined 1.7% from the prior-year quarter to $49.55 million.
Analysts expect the company’s revenue to decline 3.9% year-over-year to $435.47 million in the current quarter (ending December 2021). Moreover, GEL has missed the consensus EPS estimates in three of the trailing four quarters.
GEL’s stock has declined 3.9% over the past five days and 3.6% intra-day to close yesterday’s trading session at $11.16.
GEL has a D Sentiment grade. It is ranked #35 out of the 38 stocks in the MLPs – Oil & Gas industry. To see the additional POWR Ratings for Growth, Value, Momentum, Stability, and Quality, click here.
NOG shares were unchanged in after-hours trading Tuesday. Year-to-date, NOG has gained 183.93%, versus a 21.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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