Despite oil's rebound to its highest price of the year on Wednesday, last quarter's low oil prices, warm winter and oversupplied oil markets could make for some ugly quarterly earnings results for the oil and gas exploration and production companies, according to Credit Suisse.
"The industry does not work well with oil in the $30's and [natural] gas at $2," according to a note published by Credit Suisse's oil and gas equity analysts on Wednesday.
Following a tough 2015 where U.S. operators struggled to reduce activity fast enough to keep up with declining cash flow, "E&Ps are demonstrating capital discipline this go around as the rig count continues to make new lows," a team of analysts led my Mark Lear wrote in the note.
That said, the SIG Oil & Production Index has risen 71% off of its February lows. "Whether losses in the Q1 earnings season will drive the sector back down to create another buying opportunity or whether the market will shrug off weak 1Q free cash flow given the commodity price recovery since then will likely depend on the macro tape at the time," the analysts wrote.
The analysts see the best risk/reward opportunities in five "quality" large-cap E&P stocks -- Anadarko Petroleum, Antero Resources, Devon Energy, Marathon Oil and Noble Energy -- and five small-to-mid-cap E&P stocks, including Diamondback Energy, Gulfport Energy, Newfield Exploration and PDC Energy.
Here's a snippet of what the Credit Suisse analysts had to say about the large-cap oil favorites.
Antero Resources reports full quarterly results on April 27. Analysts, according to Thomson Reuters, estimate that the company will report a per-share earnings of 19 cents, down 30% over last year's quarter. Revenue is expected to rise 1% to $663 million.
"AR reported strong [natural gas] volumes for 1Q16 of 1,758 MMcfe/d, which came in ahead of our 1,611 MMcfe/d estimate and represents sequential growth of 17%," the analysts wrote. "Notably, NGL [natural gas liquid] production of 63.3 Mbbl/d represented growth of [approximately] 29% -- primarily as a result of ethane recovery which was initiated in December 2015 following the startup of the Sherwood deethanizer facility. As a result, ethane production for the quarter averaged 11.9 Mbbl/d. While the company did not provide an update to its production guidance, strong reported 1Q15 volumes positions it well to come in ahead of guidance of 15% growth."
Devon Energy is expected to report quarterly results in early May. Analysts, according to Thomson Reuters, estimate the company will report a per-share loss of 62 cents, down 382% over last year's quarter. Revenue is expected to fall 20% to $2.6 billion.
"We anticipate a tough quarter for DVN with quarterly commodity prices at recent lows, combined with announced restructuring charges, despite relatively flat volumes versus 4Q15," the analysts wrote.
"Cash flow from operations could potentially be negative for the quarter due in part to the higher operating cost Canadian heavy oil project running at a loss and DVN's legacy gas and NGL assets not generating much cash," the note read. "Further to this, we expect capex [capital expenditures] to come in hot in the first quarter and then ramp down over the year."
Marathon Oil is expected to report quarterly results on May 4. Analysts, according to Thomson Reuters, estimate the company will report a per-share loss of 47 cents, an improvement of 28% over last year's quarter. Revenue is expected to fall 39% to $938 million.
"With a business model that generates weak free cash flow below $40 WTI and a leverage ratio that was elevated relative to peers at the bottom of the cycle, MRO made the hard decision to raise equity near recent share price lows," the analysts wrote. "Fast forward two months and the company has executed $950m of asset sales and the shares have rallied strongly. MRO is now better positioned from a risk reward perspective with leverage in check, ample liquidity (+$6bn) and a large resource inventory with a low breakeven to develop."
Noble Energy is expected to report quarterly results on May 4. Analysts, according to Thomson Reuters, estimate that the company will report a per-share loss of 55 cents compared to a profit of 3 cents a share in last year's quarter. Revenue is expected to rise 5% to $793 million.
"We maintain our Outperform rating and raise our target price to $41 (from $40) to reflect lower differentials as a result of its updated marketing agreements in the Marcellus," the note said.
"For the year we project NBL production averaging 394.3 Mboe/d, slightly above the company's 390 Mboe/d full-year guide, driven by operational outperformance from the company's Wattenberg assets, and the initial well performance from Gates Ranch South," the analysts wrote. "The company closed $200 million in non-producing asset sales during 1Q16, and believes smaller asset sales, free cash flow in a commodity rebound, and its stake in the Tamar gas field could additionally de-lever the balance sheet going forward."