(By Mani) As we head into the final quarter of the year, let's take a look
at the current investor sentiment in the E&P (exploration and production)
space. The S&P 500 is trading at four-year highs, but one wouldn't know
that looking at the E&P sector.
Although the group enjoyed a decent run over the summer, the
E&P index is still significantly trailing the S&P 500 YTD, with a
decline of 0.8 percent vs. the S&P 500 gain of more than 14.2 percent.
Following recent meetings with investors, we believe investors
remain largely on the sidelines, but are seeking stocks that may have catalysts
during the remainder of the year that could result in their outperformance,"
Oppenheimer analyst Daniel Katzenberg wrote in a note to clients.
With oil prices hovering in the mid-$90 range, and gas prices
around $3/mcf, investors seem hesitant to make bullish calls right now.
The pullback during the fourth quarter the last couple of years has also
stayed fresh in investors' minds.
"Investor confidence remains the highest with the outlook for
oil prices. Most we've spoken with are comfortable with a price remaining range-bound
between $85/b and $95/b over the next 6-12 months," the analyst said.
On the other hand, bears believe that the economy will remain depressed
next year and push prices down to a range of $60-$70 in 2013, aided by
continued domestic supply growth.
Meanwhile, the risk/reward on natural gas stocks seems to be
attractive, and investors continue to show interest in gas-levered stocks,
there do not seem to be any near-term catalysts to push gas prices higher,
especially summer is over.
"Events that could contribute to higher prices, LNG export,
return of industrial demand, and transportation fuel switching, continue to be
more long-term solutions," Katzenberg said.
In addition, stocks in the small-cap space have been trading on
catalysts the last couple of years. However, fewer meaningful catalysts are
seen during the remainder of 2012, which could remove some of the "fast
money" investors, as drilling focus moves to down-spacing tests, pad
drilling, and other drilling efficiencies as opposed to new shale ventures. The
limited catalysts are in the Utica shale and Permian basin.
"Despite relatively few catalysts expected this fall, we do see
attractive opportunities at current levels. Our top picks are Comstock
Resources Inc. (NYSE:CRK), which is expected to report its first horizontal
Wolfcamp well over the next several weeks, and Rex Energy Corp. (NASDAQ:REXX),
which will complete its first Utica horizontal well this month," the analyst
Katzenberg also views Kodiak Oil & Gas Corp. (NYSE:KOG),
Whiting Petroleum Corp. (NYSE:WLL), and Pioneer Natural Resources Co.
(NYSE:PXD) favorably for long-term investors.