SM - How Should You Play the U.S. Upstream Oil & Gas Industry? | Benzinga
The Federal Reserve officials' cautious stance on inflation has not only delayed potential interest rate cuts but also affected market confidence and cast a pall on the Zacks Oil and Gas - Exploration and Production - United States industry. OPEC's substantial spare capacity and Russia's increasing oil exports to China, which rose 30% year on year in April, have added to supply concerns. The lowered oil demand projections for 2024 have further weighed on the space. Although macro challenges create uncertainties, there's resilience in the sector, especially for operators prioritizing growth and operational efficiency. Diamondback Energy (NASDAQ: FANG), APA Corporation (NASDAQ: APA), Matador Resources (NYSE: MTDR) and SM Energy (NYSE: SM) emerge as stocks to watch, offering potential amid the prevailing economic headwinds.
About the Industry
The Zacks Oil and Gas - US E&P industry consists of companies primarily based in the domestic market, focused on the exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc. The economics of oil and gas supply and demand are the fundamental drivers of this industry. In particular, a producer's cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns and causes them to alter their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
3 Key Trends to Watch in the Oil and Gas - US E&P Industry
Downward Pressure on Oil Prices: Recent dips in oil prices, with WTI crude futures falling below $80 per barrel, can be attributed to multiple factors. The U.S. Federal Reserve's cautious stance on inflation, requiring more signs of decline before cutting interest rates, has impacted market sentiment. The sudden death of Iran's president created uncertainty, while the substantial spare capacity existing in OPEC countries remains a concern. Russia's increased oil exports to China, rising 30% year over year, have shifted global supply patterns. Moreover, the International Energy Agency (IEA) has revised its 2024 oil demand growth forecast downward by 140,000 barrels per day, highlighting weaker consumption in developed economies.
Inflationary Environment: Most energy companies (including upstream operators) have been experiencing rising costs in the form of increased expenses related to maintenance and inventory. Despite moderating from record levels, inflation in Europe and the United States remains above threshold levels. This, together with supply-chain tightness, is not only pushing costs higher but also affecting capital ...