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Zacks Industry Outlook Highlights: Chesapeake Energy, Southwestern Energy, Kinder Morgan, Cabot Oil & Gas and Range Resources

For Immediate Release

Chicago, IL – April 27, 2016 – Today, Zacks Equity Research discusses the Oil & Gas, (Part 1), including Chesapeake Energy Corp. (CHK), Southwestern Energy Co. (SWN), Kinder Morgan Inc. (KMI), Cabot Oil & Gas Corp. (COG) and Range Resources Corp. (RRC).

Industry: Oil & Gas, Part 1


Crude Oil

U.S. oil futures ended last year 30% below the 2014 level, which itself was 46% below the 2013 level – the first time since the late 1990’s of two back-to-back negative growth years. Such was the ferocity of the crash that three of 2015’s five worst-performing stocks in the S&P 500 index were all energy companies – Chesapeake Energy Corp. (CHK), Southwestern Energy Co. (SWN) and Kinder Morgan Inc. (KMI), down approximately 77%, 74% and 63%, respectively. And now, with the failure of a producers’ meeting in Doha to agree to a production freeze plan in tackling the supply glut, prices look set to expand their 2-year rout.

In recent days, West Texas Intermediate (WTI) crude futures jumped 30% – to above $40-per-barrel – since four key oil-producing countries (Russia, Saudi Arabia, Qatar and Venezuela) reached a preliminary accord to cap future production on Feb 16. At that time, prices were hovering around their 12-year lows of around $27-a-barrel. The commodity gathered more steam on bullish talks surrounding the meeting of oil-rich countries.

However, the pact fell apart after Saudi Arabia – by far OPEC’s major contributor – insisted that the kingdom might agree to a production freeze only "if all countries” including Iran agree to limit production to Jan 2016 levels. But Riyadh’s Persian rival did not attend the meeting and vowed to increase production as it tries to bring oil back on the market post relief from international sanctions.

Oil is facing the heat on several other fronts as well. Perhaps most important pertains to the mounting worries about China’s crude demand. In particular, the Asian giant’s currency devaluation has stoked speculation about soft economic growth in the world’s No. 2 energy consumer.

What’s more, in the absence of production cuts from OPEC, the resilience of North American shale suppliers to keep pumping despite crashing prices, and a weak European economy, not much upside is expected in oil prices in the near term. Moreover, a stronger dollar has made the greenback-priced crude more expensive for investors holding foreign currency.

As it is, with inventories at the highest level during this time of the year, crude is very well stocked. On top of that, OPEC members (like Saudi Arabia) have made it clear time and again that they are more intent on preserving market share rather than attempting to arrest the price decline through production cuts. Therefore, the commodity is likely to maintain its low trajectory throughout 2016.

In the medium-to-long term, while global oil demand will be driven by U.S. and the Middle East – this will be more than offset by sluggish growth prospects exhibited by Chinese and the European economies.

In our view, crude prices in the next few months are likely to exhibit a sideways-to-bearish trend, mostly trading in the $30-$40 per barrel range. As North American supply remains strong and demand looks underwhelming, we are likely to experience pressure to the price of a barrel of oil.

Natural Gas

"It's cleaner, it's cheaper and it's domestic." - Legendary energy entrepreneur T. Boone Pickens, in reference to natural gas.

Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations or shale formations – has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.

With the advent of hydraulic fracturing (or "fracking") – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves. As a result, once faced with a looming deficit, natural gas is now available in abundance.

Statistically speaking, the current storage level – at 2.477 trillion cubic feet (Tcf) – is up 956 Bcf (63%) from last year and is 849 Bcf (52%) above the five-year average. Expectedly, this has taken a toll on prices.

Natural gas peaked at about $13.50 per million British thermal units (MMBtu) in 2008 but recently dropped to its lowest level in almost 17 years – at $1.611 per million Btu (MMBtu). Apart from plentiful stocks, which hit an all-time high in November, the selloff has been spurred by predictions of tepid demand for the fuel due to mild weather spurred by the El Niño phenomenon.

In response to continued weak natural gas prices, major U.S. producers like Cabot Oil & Gas Corp. (COG) and Range Resources Corp. (RRC) have all taken significant cost-cutting measures, including a reduction in their capital expenditure budgets.

With production from the major shale plays remaining strong and the commodity’s demand failing to keep pace with this supply surge, natural gas prices have been held back. Industrial requirement has been lackluster over the past few years with demand barely rising.

In the past, winter weather has played a factor in boosting prices with demand for domestic natural gas exceeding available supply. But with no dearth of new supply, even this association is becoming more and more obsolete. Finally, with improved drilling productivity offsetting the historic decline in rig count, we do not expect gas prices to rally anytime soon.

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CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
SOUTHWESTRN ENE (SWN): Free Stock Analysis Report
KINDER MORGAN (KMI): Free Stock Analysis Report
CABOT OIL & GAS (COG): Free Stock Analysis Report
RANGE RESOURCES (RRC): Free Stock Analysis Report
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