Natural gas is one of the oldest power sources in the United States. As crude oil and coal, natural gas is a hydrocarbon-based fossil fuel found in underground deposits. Even though natural gas is generally obtained as a ‘by-product’ in oil drilling, shale production in the United States has picked up at a significant pace over the past few years, making the country the leading producer of natural gas now. The most common application of natural gas is in gas furnaces.
After a 4% decline in 2020, natural gas in the US skyrocketed to $500 per million British thermal units yesterday as demand for the heating and power plant fuel soared amid a deep freeze. Few parts of the country witnessed temperatures below freezing last week. The coldest air in a generation is spilling out across the US, thanks to a breakdown in the polar vortex. The polar vortex is a circulation of strong, upper-level winds centered over the North Pole. These winds have recently weakened, helping to displace very cold air into the country.
Colder weather typically turns investor attention to natural gas stocks. Given this backdrop, we believe SandRidge Energy, Inc. (SD), and Lukoil PJSC (LUKOY) are well-positioned to benefit and deliver solid returns in the near-term.
SandRidge Energy, Inc. (SD)
SD is an independent oil and natural gas exploration and production company headquartered in Oklahoma City with its principal focus on developing high-return, growth-oriented projects in the U.S. Mid-Continent and Niobrara Shale.
SD has recently closed the divestiture of its North Park Basin (NPB) assets in Colorado for $47 million as part of its cash optimization-focused strategy. NPB accounted for less than 10% of the Company’s production during the third quarter and less than 10% of the company’s Proved Developed Reserves as of December 31, 2019. Additionally, in November 2020, SD closed a new credit agreement with Icahn Enterprises for $30 million, including both revolving and term loan facility, at terms much more generous than its current loan terms.
In the third quarter ended September 30, 2020, SD generated $27.7 million in revenues, declining 52.6% year-over-year. However, the company produced 5,686 million cubic feet (MMcf) of natural gas, realizing an average price of $0.97 per unit, compared to the year-ago value of $0.93. Additionally, adjusted EPS came in at $0.15, compared to the year-ago loss of $0.49 per share.
The stock has gained 70% year-to-date as SD has significantly benefited from strategic asset sales which have raised more money than expected, and is backing credit facilities at favorable terms. In line with strong gains for natural gas prices, Wall Street analysts estimate the company’s EPS to increase 5% per annum for the five years.
SD’s POWR Ratings reflect this promising outlook. SD has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
It has a grade of B for both Growth and Sentiment. It is ranked #1 of 12 stocks in the Energy – Drilling industry.
In total, we rate SD on eight different levels. Click here to check additional POWR Ratings for SD (Value, Stability, Momentum, and Quality).
Lukoil PJSC (LUKOY)
LUKOY engages in the exploration, production, refining, marketing, and distribution of oil and gas. The Russia-based company manages a retail network of 5,044 filling stations in 19 countries. It operates in two segments – Exploration and Production segment; and Refining, Marketing and Distribution segment.
LUKOY has recently completed the appraisal and independent audit of reserves as of December 31, 2020. The company’s proven hydrocarbon reserves amounted to 15.4 billion barrels. AD, of which 76% are liquid hydrocarbons. In 2020, the average daily production of hydrocarbons amounted to 2,064 thousand barrels/day. Additionally, by the end of 2020, production was gradually increased by about 100 kb/day from the May 2020 levels.
In December, LUKOY signed the Master Agreement with Gazprom PJSC, a Russia-based global energy company, on the terms of implementation of the Vaneivisskoye and Layavozhskoye Fields Development Project. On January 22, LUKOY assessed the progress of its joint venture to discuss current issues in the project.
LUKOY will publish financial results for the fourth quarter and full-year 2020 ended December 31, 2020, on March 10, 2021. However, the company has already reported an average hydrocarbon production of 2,065 thousand barrels/day in the fourth quarter, rising 9.5% sequentially. This growth can be attributed to the dynamics of external restrictions on oil production associated with the OPEC+ agreement, as well as the restoration of gas production in Uzbekistan. In the third quarter, sales revenue amounted to RUB 1,456.7 billion, improving 47.7% sequentially. LUKOY generated a net income of RUB 50.4 billion, compared to the quarter-ago loss of RUB 18.7 billion.
Despite the sharp decline in oil prices and external restrictions on production volumes last year, the development of LUKOY’s priority projects continued. The company has been securing target loans to modernize its power plants. As a result, the stock has gained nearly 25% in the past three months.
The POWR Ratings are also high on LUKOY as it has an Overall Rating of B which translates to a Buy. LUKOY also has a grade of B for Quality. Of the 53 stocks in the Foreign Oil & Gas industry, it is ranked #3.
Click here to see the additional POWR Ratings for LUKOY (Growth, Value, Momentum, Stability, and Sentiment).
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SD shares were unchanged in after-hours trading Tuesday. Year-to-date, SD has gained 74.84%, versus a 4.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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