MOSCOW (Dow Jones Newswires), May 28, 2009
Last year, investors rattled by falling oil and gas prices sought safe haven in the shares of major oil companies. But now that these commodities seem to have bottomed, the spotlight is shining on smaller companies with higher growth potential.
While shares of Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) ConocoPhillips (COP), Royal Dutch Shell (RDSA) and BP PLC (BP) have lost an average of 21% since January, the stock of smaller firms such as Chesapeake Energy Corp. (CHK), Petrohawk Energy Corp. (HK) and Newfield Exploration Co. (NFX) is up an average of 21% in the same period.
The shift underscores investor sentiment that these companies, which have promising unconventional natural gas assets in the U.S. and aggressive growth plans, are better positioned to benefit from an expected rebound in natural gas prices than international oil firms. Oil majors are having trouble increasing output and have large refining operations that eat away gains from higher prices. Besides, most of their production is oil, a commodity also expected to recover in 2010, but proportionally less than natural gas.
"Major oil companies are good defensive stocks," said Rehan Rashid, an analyst at Friedman, Billing, Ramsey & Co. Inc. in Arlington, Va. "But the hope now is that as the market turns around and commodity prices stabilize, smaller companies like Petrohawk or Newfield are the ones that will become very profitable," he said.
But not all independent natural gas producers are set to take advantage of a possible price rebound. Companies that can't produce enough cash to meet debt obligations and are unable to access credit markets to fuel new drilling have grim expectations. Oklahoma City-based Crusader Energy Group Inc., for example, filed for bankruptcy protection in March.
For this reason, analysts prefer companies with low debt and viable growth plans. Petrohawk, for example, reported Tuesday that its first-quarter output rose 15% from the fourth quarter and analysts expect its production to grow about 40% in 2009.
Shale Gas Producers, The Winners
Last summer, when oil and natural gas prices fell from their all-time high of $147.50 a barrel and $13.69 a million British thermal units, respectively, investors found refuge in the stock of major oil companies with strong balance sheets, diversified operations and were seen as able to withstand the crisis.
Prices are still weak -- with oil trading at about $47 a barrel and natural gas sinking to $3.521 a million British thermal units -- close to a six and a half year low. But investors are increasingly convinced commodity prices will recover next year driven by improved economic conditions, stronger demand for energy and tighter supply.
Some analysts are especially optimistic about the recovery of the price of natural gas as they expect the effects of a major pull back on drilling activity to curb domestic output, pushing prices up and operating costs down. The number of rigs drilling for natural gas in the U.S. has fallen by about half, since reaching a peak last September of 1,606 rigs, according to data from oilfield services company Baker Hughes (BHI).
"Investors think for the most part that the downturn in natural gas prices is not a long-term phenomenon," said Michael Jacobs, vice president of exploration and production research at Tudor, Pickering, Holt & Co. Securities Inc. in Houston.
Domestic gas producers that learned how to tap natural gas trapped in rock formations known as shales and that have enough credit or cash to survive the current lower price environment are expected to benefit the most from the possible in surge prices.
But oil majors -- which have focused on expansion plans mainly on oil and gas from massive international fields, underestimating unconventional natural gas production in the U.S.-- are likely to miss part of possible rally, analysts said.
According to Fadel Gheit, an analyst with Oppenheimer & Co. Inc in New York, the end of investor flight toward the stock of oil majors occurred when oil prices hit $33 a barrel in February and started to rebound.
"Investors made a bet then that commodity prices were not going any lower and quickly shifted their focus mainly to natural gas companies," Gheit said.
Gheit last week downgraded the stock of major oil companies from outperform to perform.
Copyright (c) 2009 Dow Jones & Company, Inc.
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