Aramco Goes Public in the Same Week Chevron Announces a Large Write Down

$25 Billion Created While $11 Billion Destroyed: What’s going on with energy stocks?

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On Tuesday, Chevron indicated it would write down assets by $10 billion to $11 billion to reflect lower energy prices and decreased expected asset returns.  The write-down would be one of the largest on record, rivaling some of the write downs taken by large banks during the financial crisis.  On Wednesday, Saudi Arabian oil company Aramco raised $25.6 billion in an IPO of 1.5% of the company’s stock.  The new Aramco stock rose 20% in the first two days of trading on the Saudi stock exchange and ended with a market value above $2.0 trillion, making it the most valuable public company.  So how should an energy investor view these two events?  Does the Aramco IPO show that there is demand for energy stocks, or is it drawing investors away from other energy stocks?  Does the Chevron write down indicate further weakness in the sector, or has the market already factored the asset value decline given recent underperformance?

Source: CNBC, XLE Energy Index versus SPDRs YTD

Red-hot Biotech Stocks Boosting Small Cap Index

Red-hot Biotech Stocks Boosting Small Cap Indexes in Q4

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Redhot Biotech
Stocks Boosting Small Cap Indexes in Q4

As of December 3, Russell 2000 Index (RUT, +7.3), which is a benchmark for small-cap stocks, is outperforming the S&P 500 (SP50, +5.2%) and Russell 3000 (RUA, +5.5%) benchmark indices in Q4 2019 (Exhibit 1). The Russell 2000 Index is a market-capitalization weighted index measuring the performance of approximately 2,000 small cap American companies in the Russell 3000 Index, which includes 3,000 largest cap U.S. stocks (adjusted annually).

Exhibit 1: Russell 2000 Relative Price
Performance, Q4 2019 (as of 12/3/2019)

Unsupported image type.

Source: CapitalIQ

The Russell 2000 index achieved a new 52-week high on November 27 (1,634.1).  The strong performance is primarily attributed to the strength in the biotechnology and financial sectors. Biotechnology is a major driver for recent gains. These sectors are heavily weighted in the Russell 2000 index with 26% for financials and 15% healthcare (Exhibit 2).

Exhibit 2: Sector
Weightings for The Russell 2000

 

Unsupported image type.

Source: New
York University Stern School of Business, FTSE Russell

Thus far, the data demonstrates a positive change in sentiment by biotechnology investors as the sector surged in Q4, in stern contrast with the relative underperformance seen in the first three quarters of 2019. Both NYSE Arca Biotechnology (BTK, 20.6%) and NASDAQ Biotechnology (NBI, +21.7%) indices have outperformed the S&P 500 (SP50, +5.2%) and Russell 3000 (RUA, +5.5%) indices by a significant margin in Q4 2019 (as of December 3, 2019) (Exhibit 3).

Exhibit 3: Biotechnology Relative Price
Performance Q4 2019 (as of 12/3/2019)

Unsupported image type.

Source: CapitalIQ

 

As the biotechnology sector soared and small-cap stocks outpaced the broader markets, picking the next gemstone in small/micro-cap biotechs could generate high cumulative returns for investors. 

Research – Energy Services of America (ESOA) – Solid Finish to Fiscal Year 2019 and Special Dividend Announced

Friday, December 13, 2019

Energy Services of America (ESOA)

Solid Finish to Fiscal Year 2019 and Special Dividend Announced.

Energy Services of America Corporation is engaged in providing contracting services for energy-related companies. The company is primarily engaged in the construction, replacement, and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. It services the gas, petroleum, power, chemical and automotive industries, and does incidental work such as water and sewer projects. Energy Service’s other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction.

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to full report for the price target, fundamental analysis, and rating.

Solid End to fiscal year with results above expectations. FY2019 EBITDA of $8.0 million was above our estimate of $6.6 million estimate due to lower costs that more than offset lower revenue. The completion of the Goff project had a slightLY negative impact, but margins were higher than expected; gross margin was 7.3% (+87 basis points) and EBITDA margin was 4.6% (+85 basis points). The current backlog of $63 million was up $8 million higher than 3Q2019.

Increasing FY2020 EBITDA to reflect positive finish to FY2019. Assuming no weather and/or operating miscues, we forecast that FY2020 EBITDA will move up to $8.6 million based on EBITDA margin of 5.6%, which is…




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Research – Energy Services of America (ESOA) – Launching Coverage. Looking for Solid Finish to Fiscal Year.

Wednesday, December 11, 2019

Energy Services of America (ESOA)

Launching Coverage. Looking for Solid Finish to Fiscal Year.

Energy Services of America Corporation is engaged in providing contracting services for energy-related companies. The company is primarily engaged in the construction, replacement, and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. It services the gas, petroleum, power, chemical and automotive industries, and does incidental work such as water and sewer projects. Energy Service’s other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction.

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Launching coverage on Energy Services of America (ESOA),  a small cap idea in the construction services industry with an energy focus. ESOA helps energy and utility companies build out and maintain distribution networks.

End to FY2019 should be solid.  After two uneven years and delays on a large project, we expect FY2019 to finish on a solid note. Our EBITDA estimate of $6.6 million compares to $8.1 million in FY2018 and $3.6 million in FY 2017. FY2020 operating results poised to rebound. While the outlook for overall infrastructure activity is more muted versus the past five years due to lower energy prices, the risk profile has improved with less large projects. Assuming there are no weather and/or…




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Research – Energy Fuels (UUUU) – No Big Surprises

Monday, November 4, 2019

Energy Fuels Inc. (UUUU)

No Big Surprises

Energy Fuels Inc together with its subsidiary is engaged in the extraction and recovery of uranium properties in the United States. The company operates in two segments, ISR Uranium and Conventional Uranium. It conducts its ISR activities through its Nichols Ranch Project, located in northeast Wyoming. It conducts its conventional uranium extraction and recovery activities through its White Mesa Mill. In addition, the group also owns uranium and uranium, vanadium properties and projects in various stages of exploration, permitting, and evaluation. Energy Fuels derives most of the income through the sale of Uranium.

Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to full report for price target, fundamental analysis and rating.

  • Third quarter results in line with expectations. Energy Fuels reported a third quarter loss of $6.8 million, or ($0.07) per share compared to a loss of $13.8 million, or ($0.16) per share, during the prior year period.  We had expected a loss of $6.4 million, or ($0.07) per share.
  • Updating estimates.  We are increased our 2019 loss estimate to ($0.36) per share from ($0.34) per share based on lower revenue anticipated in the fourth quarter.  Due to low commodity prices, we expect the…


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Is Fracking Safe?

Is Fracking Safe?

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Oil and natural gas production have grown dramatically due to the introduction of horizontal drilling and hydraulic fracking. Fracking is a drilling technique in which water, sand, and chemicals are pumped into well holes under high levels of pressure, fracturing shale formations to increase the flow of hydrocarbons toward the well. Opponents of fracking have made claims that the procedure leads to health and ecological concerns.

Are Planned Power Outages Worth the Cost?

Are Planned Power Outages Worth the Cost?

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Pacific Gas & Electric cut power to more than one million customers in the San Francisco Bay Area this week as a precaution against sparking wildfires. The utility took this unusual step in response to high-wind and drought conditions. The planned blackout comes after northern California rebounds from two of the most damaging wildfires in history: the winery wildfire of 2017 and the Paradise wildfire of 2018. The outage is creating an extreme hardship for customers without power. Are the utility’s actions prudent given recent wildfire issues (bull case) or is the company overreacting to concerns that it should have addressed long before now (bear case)?

Industry Report – Energy – Summer’s End Brings No Relief For Energy Stocks

Tuesday, October 8, 2019

Energy Industry Report

Summer’s End Brings No Relief For Energy Stocks

Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.

Listen To The Analyst

Refer to end of report for Analyst Certification & Disclosures

  • Energy stocks fell 9% underperforming the overall market by 8% for the second straight quarter. The decline matches the drop in oil prices. Natural gas prices were flat, which is not uncommon for the summer quarter.
  • Oil prices fell 9% as two spikes proved to be short lived. Oil prices crossed above $60/BBL twice in response to Persian Gulf tension, but quickly declined when conflicts did not escalate. Oil inventories continue to rise as the U.S. approaches the point of being a net energy exporter. Investor focus has shifted to a slowing global economy.
  • A sustained period near $50/BBL could put pressure on energy companies. The long-term futures curve is flat. Hedges are rolling off and companies are being forced to work to lower capital expenditures and operating costs to stay within operating cash flow. Smaller companies with weak balance sheets may face liquidity issues.
  • We remain cautious on the group. We favor companies with low debt levels, high hedge positions and low operating costs.

Energy stocks reported another disappointing quarterly as oil prices continued their decline. The XLE Energy Select Sector SPDR Fund fell 9.3% over the three months ended September 30, 2019. This compared to a decline of 1.3% for the S&P 500 Index. This is the second consecutive quarter in which the XLE has underperformed the overall market by approximately 8%. As is usually the case, one need only to look at the performance of oil prices to explain the poor stock performance.

Oil prices, as measured by the WTI November 2019 future price, declined 9.3% from $59.14 per barrel to $53.62 per barrel. The path downward, however, was anything but steady. Oil prices rose sharply in June and again in September to levels above $60 per barrel in response to tension in the Persian Gulf. Higher prices were short lived. Both times, oil prices sank $10 per barrel to a level in the low fifties in the three weeks following the rise. Natural gas prices, as measured by Henry Hub November 2019 futures, were essentially flat rising a modest 0.8% from $2.266 per thousand cubic feet (mcf) to $2.283 per mcf. This is not unusual during the summer quarter when there are few heating degree days.

Oil inventories continue to rise with the EIA reporting consolidated oil stocks of approximately 2 million BBLS (as of 9/27), up 1.7% from a year ago. Of note, domestic production rose approximately 15% year over year and net imports fell 33%. The EIA estimates that the United States could become a net exporter of energy in 2020. Rising domestic production, combined with concerns of a global economic slowdown, seem to be having a bigger impact on oil prices than political tension in the Persian Gulf.

The oil future’s curve is relatively flat at prices near current levels. Many energy companies took advantage of the oil price spikes to add to their hedge positions. For those who didn’t, the opportunity has passed. Longer-term oil prices do not show any relief to producers.

The current outlook for the energy sector remains somewhat negative. Companies are under pressure to lower their operating costs to justify production at $50 per barrel prices. Most companies try to limit expenses to a level within their generated cash flow. With prices down, that means cutting back on operating costs and capital expenditures. A prolonged period at prices near or below $50 per barrel could test the liquidity of companies with burdensome debt levels or high operating costs.

We remain cautious regarding energy stocks. We favor companies with low debt levels, high hedge positions and low operating costs.

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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE

Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.”
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Outperform: potential return is >15% above the current price 86% 25%
Market Perform: potential return is -15% to 15% of the current price 14% 2%
Underperform: potential return is >15% below the current price 0% 0%

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Is the US Accelerating toward Becoming the World’s Energy Capital?

Is the US Accelerating toward Becoming the World’s Energy Capital?

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Production of oil and natural gas in the United States is growing at a rapid pace due to technological advances. As a result, the US is approaching a position of becoming a net exporter of energy for the first time since the Fifties. Most energy exports out of the US will originate in the Gulf of Mexico as new pipelines move oil and gas from the Permian Basin (West Texas and New Mexico) to refineries in the Gulf. This new supply has the potential to make the Gulf of Mexico the largest exporting hub in the world within the next few years. Could this mean that the United States is becoming the new energy capital of the world?

Offshore Wind Power Blows into the Energy Market

Offshore Wind Power Blows into the Energy Market

Offshore wind power is one of the most exciting and fastest-growing industries in renewable energy. Without any landmasses in the way, wind offshore blows strongly and consistently without interruption. Furthermore, offshore provides ample space and fewer restrictions for installing massive turbines, making offshore wind an attractive energy alternative to support the electric power needs of our populous coastal communities. Offshore wind turbines may achieve a higher output, but their remote ocean locations present costly challenges to installation. Additionally, a salty and humid environment at sea means much more maintenance than their land counterparts. However, improved efficiencies from advances in technology as well as government support have encouraged rapid growth of offshore wind energy installations in the past few years.

During 2018, the global capacity of offshore wind energy grew by 24% for a total of 23 gigawatts (GW) of annual energy production capacity, according to the Global Wind Energy Council (GWEC), an international trade association for the wind power industry. This explosive growth was partially fueled by the opening of the world’s biggest offshore wind farm off the coast of the United Kingdom. This wind farm can produce 659 megawatts (MW) annually, which is enough to power 590,000 homes. With this substantial addition, offshore wind power now provides nearly a tenth of the UK’s electricity. Indeed, the rapid acceleration of offshore wind energy installations inspires an optimistic outlook for this abundant renewable energy source.

Will the Oil Slowdown Provoke a Renewable Energy Takeover?

Will the Oil Slowdown Provoke a Renewable Energy Takeover?

The Organization of the Petroleum Exporting Countries cut its demand forecast for the second consecutive month on Wednesday. The OPEC reduced the expected use for the remainder of the year to 1.02 million barrels per day, which is down 80,000 b/d from the August estimate. This decrease is attributed to the weaker-than-expected economic data in the first half of the year.

Will Renewable Energy be the Downfall of Fossil Fuels?

Will Renewable Energy be the Downfall of Fossil Fuels?

Fossil fuel has been the main energy source since the mid-1700s during the Industrial Revolution. It has provided the majority of our power since then, but research shows that when burned, it has negative impacts on the environment. For this reason, many countries have been searching for an alternative, preferably a renewable one. Solar and wind power have been the most prominent choices and have seen a jump in popularity in recent years.

Research – Genie Energy (GNE) – Earnings Miss Causes Decline in Stock

Tuesday, August 6, 2019

Genie Energy (GNE)

Earnings Miss Causes 30% Decline In Stock

Genie Energy Ltd through its subsidiaries operates as a retail energy provider; and an oil and gas exploration company. It operates through three segments: Genie Retail Energy; Afek Oil and Gas, Ltd.; and Genie Oil and Gas. The company resells electricity and natural gas to residential and small business customers primarily in the Eastern and Midwestern United States and offers energy brokerage and advisory services.

Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to full report for price target, fundamental analysis and rating.

  • What went wrong? Genie reported $(0.29) vs $(0.09) and our $0.09 est. Adjusted EBITDA was $(9.1) million vs $(1.6) million. Shortfall can be attributed to Retail Energy top line which reported Gross Profit of $8.2 million vs $15.8 million.
  • Why were Energy Service results down? Mild weather meant lower usage and a charge for hedging more supply than needed. Customers switching to….



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