CHICAGO, Jan. 18, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Machinery, including Chevron Corp. (CVX), Helmerich & Payne Inc. (HP), Tesoro Corp. (TSO),Valero Energy Corp (VLO) Marathon (MPC)
Industry: Oil & 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. In fact, natural gas inventories in underground storage have persistently exceeded the five-year average since late September 2011 and ended the usual summer stock-building season of April through October at a record 3.923 trillion cubic feet (as of October 31, 2012).
This prompted natural gas prices to dive approximately 63% from the 2011 peak of $4.92 per million Btu (MMBtu) to a 10-year low of $1.82 per MMBtu during late April 2012 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana ).
Looking forward, EIA expects average total production to rise from 69.2 billion cubic feet per day (Bcf/d) in 2012 to 69.8 Bcf/d in 2013, while total natural gas consumption is anticipated to remain relatively flat this year at 69.7 Bcf/d.
However, with the U.S. winter set to be colder than the unusually warm last one, we might expect some balancing of the commodity's supply/demand disparity on the back of its more normalized use for space heating by residential/commercial consumers.
But until then, the weak fundamentals are going to continue to weigh on natural gas prices, translating into limited upside for natural gas-weighted companies and related support plays.
Considering the turbulent market dynamics of the energy industry, we always advocate the relatively low-risk conglomerate business structures of the large-cap integrateds, with their fortress-like balance sheets, ample free cash flows even in a low oil price environment and growing dividends.
Our preferred name in this group remains Chevron Corp. (CVX). Its current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, Chevron possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.
Within the contract drilling group, we like Helmerich & Payne Inc. (HP). Supported by a superior and diversified drilling fleet, together with a healthy financial profile, we expect the company to sustain its profitability over the foreseeable future. We believe Helmerich's technologically-advanced FlexRigs will continue to benefit from an upswing in U.S. land drilling activity and the shift to complex onshore plays that require highly intensive solutions.
Buoyed by the favorable trends in the refining sector, we are more optimistic on the industry than we were 12 months ago. An uptick in economic activity overseas (mainly in developing countries) and prospects for lower feedstock costs are likely to push 2013 industry margins higher than last year's levels. Against this backdrop, we are particularly bullish onTesoro Corp. (TSO), Valero Energy Corp. (VLO) and Marathon Petroleum Corp. (MPC).
Zacks Industry Rank
The Zacks Industry Rank, which derives its predictive power from the time-tested Zacks Rank, helps us identify the industries that are expected outperform others. The top 1/3rd of the Zacks Industry Rank qualify as industries with 'Good' prospects, the bottom 1/3rd have 'Bad' prospects, and middle 1/3rd as 'Neutral.' Most of the constituent 'industries' in the business services sector fall in the top 1/3rd of the list.
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