The Zacks Analyst Blog Highlights: Peabody Energy, First Solar, Noble Energy, Anadarko Petroleum and Ultra Petroleum
CHICAGO, May 23, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Peabody Energy Inc. (NYSE:BTU-Free Report), First Solar, Inc. (Nasdaq:FSLR-Free Report), Noble Energy, Inc. (NYSE:NBL-Free Report), Anadarko Petroleum Corporation (NYSE:APC-Free Report) and Ultra Petroleum Corp. (NYSE:UPL-Free Report).
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.
Here are highlights from Thursday's Analyst Blog:
Russia, China Gas Deal a Threat to U.S.?
After a decade long deliberation, Russian natural gas giant Gazprom and China National Petroleum Corporation have finally signed a natural gas supply agreement. Per the agreement, Gazprom will supply 38 billion cubic meters of natural gas to China annually from 2018 for the next three decades. The supply volume may increase to as much as 61 billion cubic meters annually.
Value of the Deal
The historic deal is expected to be valued at $400 billion. The Russian officials were tight lipped about the value of the natural gas prices at which the deal was finalized, but confirmed that the pricing was made at market rates.
What Expedited the Deal?
Well, one can only muse why a deal that took 10 years in the making was signed overnight in the wee hours of the morning in Shanghai. It appears that the threat of imposing stricter sanctions on Russia following its misadventure in Ukraine from the western world must have led Russian top officials to seal the natural gas supply deal with neighboring China. The increasing possibility that the EU will spurn gas imports from Russia (EU imported 160 billion cubic meters of gas in 2013) must have been a lurking fear for Russia to seek a trade ally.
China for its part has shown phenomenal growth. Though fears of a slowing Chinese economy have stalked the markets lately, the proposed introduction of capital market reforms from the government might act as a catalyst going forward. It goes without saying that industrial growth is powered by the energy sector and China needs more gas for running its factories. This bilateral trade relation between China and Russia is also an important symbolic step.
We also believe that the shale gas boom in the U.S. and the gradual permissions given by the U.S. Department of Energy to export natural gas have also prompted the Russia-China natural gas supply deal.
ChinaDrives a Hard Bargain
Undoubtedly, China will need more energy to sustain industrial growth. China utilized 170 billion cubic meters of natural gas in 2013 and this will increase going forward. So, finding a reliable supplier of natural gas at a favorable price was a top priority for China. It seems Gazprom has offered China gas at a lower price than what they charge the EU for gas exports.
Natural gas export contributes a major chunk of Russian export revenues. Sanctions against Russia due to mounting tensions with the West regarding Ukraine and other issues must have driven it to find another gas market. China made the most of the situation, driving a hard bargain.
Will the Deal Impact U.S. Operators?
The deal is sure to strengthen ties between Russia and China. But the important question is whether it will affect the prospects of the U.S. operators. It is time to check some ground realities and ascertain the extent of demand for energy in China. Per a report from the U.S. Energy Information Administration (EIA), the total energy usage in China will increase to 219.9 quadrillion Btu in 2040 from 115.5 quadrillion Btu in 2012.
Per the deal, the supply of natural gas will begin only from 2018 and the volume supplied will by merely 1/5th of the total volume consumed by China in 2013. So, there will be enough room for other natural gas operators to supply gas to the country.
Moreover, going forward, natural gas usage will not be sufficient to meet the increasing Chinese demand for energy. China will willy-nilly have to depend on coal and other alternate energy resources. Here the U.S. companies like coal supplier Peabody Energy Inc. (NYSE:BTU-Free Report) and solar module maker First Solar, Inc. (Nasdaq:FSLR-Free Report) will come into play among others.
Finally, if the E.U. decides not to import natural gas from Russia, new opportunities will open up for U.S. operators like Noble Energy, Inc. (NYSE:NBL-Free Report) which has a presence in the Leviathan Basin in offshore Israel and Anadarko Petroleum Corporation (NYSE:APC-Free Report) with a strong presence in Africa.
U.S.Heading Towards Gas Exports
A current report from the U.S. Energy Information Administration (EIA) suggests that the shale boom will actually result in 1.6% annual growth of natural gas production in the U.S. from 2012 through 2040. As a result, after meeting domestic demand, the U.S. will become a net exporter of natural gas by 2020. So, from a net importer of 1.5 trillion cubic feet ("Tcf") of natural gas in 2012, the U.S. will likely be a net exporter of 5.8 Tcf in 2040.
To Sum Up
This deal appears to be a desperate move by Russia to secure an alternative gas market. That said, it is not going to impact the natural gas exports of U.S. operators. China here will continue to be an important market – the shale boom in onshore U.S. will find markets in China and other developing nations in urgent need for cheap gas.
Ultra Petroleum a Strong Buy – Here's Why
On May 22, Zacks Investment Research upgraded Houston, Texas-based predominantly natural gas producer Ultra Petroleum Corp. (NYSE:UPL-Free Report) to a Zacks Rank #1 (Strong Buy).
Why the Upgrade?
Ultra Petroleum's focus on profitable growth, disciplined capital allocation and future rebalancing initiatives make it a great stock to own.
Detailed Analysis
Ultra Petroleum is noted for growing its reserve base through balanced acquisitions, as well as through development and exploration programs. This has been supplemented by successful drilling activities, which helped the company boost its year-end 2013 proven reserves by 18% to 3.61 trillion cubic feet equivalent.
Ultra Petroleum controls substantial acreage in and around the prolific Jonah natural gas field and the Pinedale Anticline area in the Green River Basin. Both of these areas are endowed with rich natural gas reserves, which have remained largely untapped to date.
However, concerned by the continuing volatility in gas prices of late, Ultra Petroleum has aligned its capital program more toward growing oil production. In the first quarter of 2014, the company achieved oil production of 658,049 barrels, representing a whopping 145% year-over-year increase. The recent purchase of high-return oil-rich acreage in Utah's Uinta basin will is expected to further drive Ultra Petroleum's liquids volumes.
The acquired properties consist of 38 operating wells that generate roughly 4,000 barrels of oil each day. Management anticipates strong earnings from the assets even if there is a drop in oil prices to below $75 per barrel.
Finally, Ultra Petroleum maintains a very competitive cost structure, which contributes to the consistency of its growth and returns throughout the business cycle. During 2013, the company reported all-in operating costs of $2.86 per thousand cubic feet equivalent – one of the best in its peer group. As a result of Ultra's low cost base, it was able to achieve a 55% cash flow margin and a 28% net income margin amid low natural gas prices.
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