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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Can Less Diversified Energy Companies Replicate Big Oil’s Success?

  • Oil majors are breaking revenue and cash flow records in blockbuster earnings season.
  • Many midcap crude companies are also beating earnings expectations.
  • Several midcaps remain undervalued compared to their bigger peers

Earnings season for corporate America is well underway, with nearly 60% of S&P 500 companies having returned their Q2 2022 scorecards. While a good 73% of S&P 500 companies have reported a positive EPS surprise while 66%  have exceeded revenue expectations, it's the energy sector that is once again hogging the limelight, with records being set right, left and center. According to the latest earnings insights by FactSet, the positive EPS surprises reported by Chevron (NYSE: CVX) ($5.82 vs. $5.08), Exxon Mobil (NYSE: XOM)($4.14 vs. $3.94), Valero Energy (NYSE: VAL) ($11.36 vs. $9.26), and Phillips 66 (NYSE: PSX) ($6.77 vs. $5.95) have been substantial contributors to the increase in the earnings growth rate for the entire index during the week, leading to the blended earnings growth rate for the Energy sector increasing to 290.3% from 265.2%.  

Meanwhile, Big Oil's cash hauls have broken several company records.

ExxonMobil, Chevron, and Shell (NYSE: SHEL) together brought in $46 billion in earnings in the second quarter, with all three setting new records for quarterly earnings. In an interview Friday with CNBC, Exxon's CEO Darren Woods attributed the outsized earnings to companies investing more while competitors focused on getting money back to investors.

"What we're seeing today is that extra production that we invested in five years ago and since then, that we're in a position to bring more product to market," he said.

The million-dollar question now: can smaller energy companies replicate the success of their heavyweight brethren? The answer appears to be in the affirmative.

Three mid-cap oil and gas companies have so far reported Q2 earnings, and all have managed to comfortably exceed both revenue and earnings estimates.

ExlService (NASDAQ: EXLS) has reported Q2 Non-GAAP EPS of $1.50, beating by $0.18, while revenue of $346.8M (+26.1% Y/Y) beat by $17.2M.

Natural gas player Range Resources' (NYSE: RRC) Q2 Non-GAAP EPS of $1.27 was $0.06 better than the Wall Street consensus, while revenue of $1.22B (+181.8% Y/Y) beat by $260.09M.

Meanwhile, PBF Energy (NYSE: PBF) reported some wild top-and bottom-line beats, with Q2 Non-GAAP EPS of $10.58 beating by $3.26 while revenue of $14.08B (+104.1% Y/Y) beat by $3.41B.

Related: EU Gas Dependence On Russia Falls By 50%

But why bother with energy companies with lower market capitalization and higher volatility?

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When it comes to long-term investing in the oil and gas sector, heavyweights such as ExxonMobil, Chevron Corp., ConocoPhillips (NYSE:COP), BP Plc (NYSE:BP), and Shell tend to garner the most attention. However, overlooking mid-cap oil and gas stocks (market-caps between $2 billion and $10 billion) can sometimes mean leaving plenty of money on the table. Although these smaller companies tend to receive less analyst coverage as compared to large caps, they offer more growth opportunities than large cap stocks but exhibit less volatility than their small-cap peers.

In recent months, we've already seen a lineup of mid-cap energy stocks outperform larger ones, and Wall Street is paying attention. 

Here are some mid-caps to watch as they gear up to report Q2 earnings.


1. Murphy Oil

 

Market Cap: $5.3B

YTD Returns: 22.3%

Murphy Oil Corporation (NYSE: MUR) operates as an oil and natural gas exploration and production company in the United States, Canada, and internationally. The company explores for and produces crude oil, natural gas, and natural gas liquids. 

Murphy Oil Corporation is slated to report second-quarter 2022 financial results on Aug 4 before market open. The company delivered an earnings surprise of 23.7% in the first quarter. The company's Zacks Consensus Estimate for second-quarter 2022 revenue is pegged at $824.1 million, good for 49.9% Y/Y growth, while the consensus estimate for second-quarter earnings per share (EPS) is pegged at $1.42, implying a 140.7% Y/Y surge.

2. Chesapeake Energy

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Market Cap: $11.5B

YTD Returns: 39.0%

Regarded as a shale drilling pioneer, Chesapeake Energy Corporation (NYSE: CHK) is an independent exploration and production company that engages in the acquisition, exploration, and development of properties for the production of oil, natural gas, and natural gas liquids from underground reservoirs in the United States. The company holds interests in natural gas resource plays in the Marcellus Shale in the northern Appalachian Basin in Pennsylvania and the Haynesville/Bossier Shales in northwestern Louisiana; and the liquids-rich resource play in the Eagle Ford Shale in South Texas. 

As of December 31, 2021, Chesapeak had interests in ~8,200 gross productive wells, including 6,500 wells with working interest and 1,700 wells with an overriding or royalty interest holding an estimated proved reserves of 661 million barrels of oil equivalent.

Chesapeake Energy Corporation will report second-quarter 2022 results on Aug 2, after the closing bell. The Zacks Consensus Estimate for CHK's second-quarter EPS is $3.74, having been revised upwards four times with no downward revision--which is considered a good sign.

3. Centennial Resource Development

Market Cap: $1.9B

YTD Returns: -0.78%

Denver, Colorado-based Centennial Resource Development, Inc., (NASDAQ: CDEV) is an independent oil and natural gas company that focuses on the development of crude oil and related liquids-rich natural gas reserves in the United States. Its assets primarily focus on the Delaware Basin, a sub-basin of the Permian Basin. 

Centennial's properties consist of acreage blocks primarily in Reeves County, West Texas and Lea County, New Mexico. As of December 31, 2021, it leased or acquired approximately 73,675 net acres; and owned 991 net mineral acres in the Delaware Basin.

Centennial Resources is set to report Q2 earnings on Aug 3 after the closing bell.  The Zacks Consensus Estimate for the company's per share of 41 cents has seen two upward revisions as well as two downward movements over the past 30 days, suggesting mixed sentiment on the company. This is probably informed by the fact that the company has exceeded Wall Street's expectations 2-out-of-4 times in the trailing four quarters. However, the Zacks Consensus Estimate for Q2 revenues of $394 million indicates a 69.1% Y/Y improvement.

About a month ago, RBC Capital upgraded CDEV to Outperform from Sector Perform with an $11 price target, good for 70% upside, citing its relative valuation vs. peers and confidence in its operational and financial profile.

By Alex Kimani for Oilprice.com

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