Zacks Bull and Bear of the Day Highlights: ProAssurance, Ultra Petroleum, Talisman Energy, Encana and Chesapeake Energy
CHICAGO, March 1, 2012 /PRNewswire/ -- Zacks Equity Research highlights: ProAssurance Corp. (NYSE: PRA) as the Bull of the Day and Ultra Petroleum Corp. (NYSE: UPL) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Talisman Energy Inc. (NYSE: TLM), Encana Corp. (NYSE: ECA) and Chesapeake Energy Corp. (NYSE: CHK).
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Full analysis of all these stocks is available at http://at.zacks.com/?id=2678.
Here is a synopsis of all five stocks:
ProAssurance Corp.'s (NYSE: PRA) fourth quarter earnings surpassed the Zacks Consensus Estimate on the back of an improved top line. Additionally, operating cash flow and asset position also improved, driving the book value of shares. Higher operating cash flow is also likely to translate into enhanced operating leverage and excess capital generation for share repurchases.
Though the intense price and product competition, weak rate environment, loss cost trends and regulatory challenges limit the desired upside in the sector, we believe the benefits of geographic diversity, aggressive claims defense, stable ratings, improving ROE and strong financial position are likely to have a positive impact on the company over time.
Our six-month target price of $107.00 per share equates to about 18.3x our earnings estimate for 2012. Combined with the $1.00 per share annual dividend, this target price implies an expected return of 20.0% over that period, which is consistent with our Outperform recommendation.
Concerned by the current weak sentiment for natural gas, we are downgrading Ultra Petroleum Corp. (NYSE: UPL) shares to Underperform from Neutral. The glut in domestic gas supplies continues to weigh on the fundamentals, and storage levels remain well above their benchmark levels. This translates into a bearish near-to-medium term outlook for natural gas-weighted companies like Ultra.
Taking a cautious view of prices, the company's capital program this year is cutting on dry natural gas development. Even then, we expect Ultra to perform below its peers and industry levels in the coming months. We believe there are other companies in the natural gas E&P group that seem to offer better exposure to the sector.
We expect the company to continue to struggle unless the outlook for natural gas prices improves. This is corroborated by our new Underperform recommendation. Our $22 price objective reflects a multiple of 4.5X trailing twelve-month cash flow.
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Nat Gas Rig Count Falling
he natural gas rig count has been falling since the last few weeks, 224 rigs in fact (or 24%) from the recent highs of 934 in October 28. Is this bullish for natural gas fundamentals? The answer is "no," if we look at the U.S. production and the shift in rig composition.
With horizontal rig count – the technology responsible for the abundant gas drilling in domestic shale basins – currently close to its all-time high, output from these fields remains robust. As a result, gas inventories still remain at elevated levels – up 40% from benchmark levels.
In fact, natural gas prices have dropped some 47% from 2011 peak of about $5.00 per million Btu (MMBtu) in June to the current level of around $2.65 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana). Incidentally, prices hit a 10-year low of $2.23 in late January.
To make matters worse, mild winter weather across most of the country has curbed natural gas demand for heating, indicating a grossly oversupplied market that continues to pressure commodity prices in the backdrop of sustained strong production.
This has forced several natural gas players to announce drilling/volume curtailments. Exploration and production outfits like Talisman Energy Inc. (NYSE: TLM) and Encana Corp. (NYSE: ECA) have all reduced their 2012 capital budget to minimize investments in development drilling.
On the other hand, Oklahoma-based Chesapeake Energy Corp. (NYSE: CHK) – the second-largest U.S. producer of natural gas – has opted for production shut-ins to cope with the weak environment for natural gas that is likely to prevail during the year.
However, we feel these planned reductions will not be enough to balance out the massive natural gas supply/demand disparity and therefore we do not expect much upside in gas prices in the near term. In other words, there appears no reason to believe that the supply overhang will subside and natural gas will be out of the dumpster in 2012.
Get the full analysis of all these stocks by going to http://at.zacks.com/?id=2649.
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