California Resources Stock Could Be a Huge Long-Term Winner

Diversified Energy Company Plc DEC is slated to report third-quarter 2024 results on Nov. 12, before market open.

See the Zacks Earnings Calendar to stay ahead of market-making news.

The Zacks Consensus Estimate for revenues is pegged at $258.5 million, while that for earnings is pinned at 30 cents per share. The bottom-line estimate has moved down 48.3% in the past 60 days.

Earnings Whisper for DEC

Our proven model does not predict an earnings beat for Diversified Energy this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat, which is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

DEC has a Zacks Rank #5 (Strong Sell) and an Earnings ESP of 0.00% at present.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors Shaping DEC’s Upcoming Q3 Results

In August 2024, the company completed the acquisition of certain upstream assets and related infrastructure in the East Texas area of the Central Region from Crescent Pass Energy. Positive synergies from this buyout, along with that of the OakTree acquisition completed earlier, might have contributed favorably to Diversified Energy’s operating results in the third quarter.

However, lower average daily production volume, primarily that of natural gas, might have adversely impacted the company’s revenues, which should be reflected in the upcoming results.

Nevertheless, higher daily production volume and an increased average realized sales price of natural gas liquid (NGL) and oil can be expected to have boosted DEC’s overall top-line performance.

Moreover, the company’s disciplined and consistent hedge program is likely to have improved its operating margin. This must have contributed favorably to its bottom-line performance, outweighing the challenging commodity price environment it has been facing lately.

However, higher employees, administrative costs and professional services owing to investments made in staff and systems and costs related to services required for DEC’s listing on two stock exchanges are likely to have pushed up its general and administrative expenses. This, in turn, might have adversely impacted its overall earnings.

Price Performance & Valuation

While the aforementioned factors may send mixed impulses, a detailed analysis of its year-to-date price performance and the stock’s valuation should help one make a more informed decision.

Diversified Energy shares have lost 12.4% in the year-to-date period, underperforming the Zacks Alternative-Energy industry’s surge of 45.9% and the broader Zacks Oils-Energy sector’s growth of 5.9%. It has also lagged the S&P 500’s return of 24.8%.

On the contrary, other industry players, such as Talen Energy Corporation TLN, Constellation Energy Corporation CEG and GE Vernova Inc. GEVO, have delivered stellar performances. TLN, CEG and GEVO’s shares have surged 222.1%, 107.4% and 6.38%, respectively, year to date.

Regarding valuation, DEC’s forward 12-month price-to-earnings (P/E) is 12.69X, a discount to its peer group’s average of 23.94X. This suggests that investors will be paying a lower price than the company's expected earnings growth compared to that of its peers.

Investment Thesis

With the global energy transition underway, there has been a rapid shift in consumers’ preference from fossil fuel to renewable energy, a process that has been impacting the demand of natural gas worldwide. This might have been the reason behind DEC registering a 17.6% year-over-year plunge in its total revenues (including settled hedges) during the first half of 2024. The production volume declined formidably in the same period.

DEC’s financial position does not seem to be very strong at the moment. As of June 30, 2024, the company’s net debt, worth $1.65 billion, increased year over year, while its cash and cash equivalent of $0.03 billion remained quite insignificant compared to the former.

Looking ahead, as industries across the board rapidly adopt renewables as their preferred energy source, the significance of natural gas may diminish considerably over the next few years. With DEC’s portfolio heavily inclined toward natural gas and its unimpressive financial position, the company’s growth opportunities might remain restricted.

Final Thoughts

To summarize, Diversified Energy is likely to disappoint with its third-quarter results, considering the recent downward revision in its earnings estimates, unfavorable Zacks Rank and an unimpressive Earnings ESP.

Also, considering its dismal price performance so far this year and doubtful long-term growth prospects, investors interested in DEC stock should wait until next Tuesday.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks Investment Research

For Immediate Release

Chicago, IL – November 8, 2024 – Today, Zacks Equity Research discusses Civitas Resources CIVI, Northern Oil and Gas NOG, California Resources CRC and Amplify Energy AMPY.

Industry: U.S. Oil & Gas - E&P

Link: https://www.zacks.com/commentary/2365990/a-closer-look-at-the-us-upstream-oil-gas-industry

The Zacks Oil and Gas - Exploration and Production - United States industry faces growing headwinds. With potential Republican-led policies encouraging increased domestic production, U.S. output could see a rise, expanding supply and likely softening oil prices. Additionally, China's slowing oil demand, despite government stimulus efforts, may contribute to weaker global prices, especially if OPEC+ production cuts don't offset the lagging demand.

Further, rising renewable energy and electric vehicle adoption continue to challenge long-term oil consumption, with countries like China advancing electrification efforts, leading to an earlier-than-expected peak in its oil imports. However, Middle East tensions could push prices up quickly if conflicts threaten critical supply routes. Amid these dynamics, select companies like Civitas Resources, Northern Oil and Gas, California Resources and Amplify Energy stand out, offering solid fundamentals and strategic positioning.

About the Industry

The Zacks Oil and Gas - US E&P industry consists of companies primarily based in the domestic market, focused on the exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc. The economics of oil and gas supply and demand are the fundamental drivers of this industry.

In particular, a producer's cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns and causes them to alter their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.

4 Key Trends to Watch in the Oil and Gas - US E&P Industry

Potential Increase in U.S. Oil Production: With the U.S. election results favoring a Republican administration, policies supporting increased hydrocarbon production may be enacted. Such an approach could lead to a significant rise in U.S. oil output, adding to global supply and putting downward pressure on oil prices. Increased domestic production would reduce dependency on foreign oil, potentially leading to a price reduction as supply levels rise.

Impact of Weakening Chinese Consumption: China's demand for crude oil remains a key determinant in global oil prices. Although government stimulus measures aim to boost economic growth, recent signs of slower demand growth from China have prompted OPEC+ production cuts. If demand from China does not recover as expected, global oil prices could remain subdued due to a combination of ample supply and restrained demand.

Geopolitical Tensions in the Middle East: Escalating conflict between Israel and Iranian-backed forces could disrupt oil supplies if it spreads to critical areas like the Persian Gulf or Straits of Hormuz. Such disruptions could spark sharp price spikes due to potential threats to Iran's oil production or logistical chokepoints. Any intensification of hostilities would heighten supply fears, driving oil prices upward amid increased volatility.

Growing Renewables and EVs Threaten Oil Demand: The global shift to renewable energy and electric vehicles (EVs) presents a long-term challenge for oil demand. While renewable infrastructure growth is gradual, advancing technology and rising EV use are expected to reduce reliance on fossil fuels, potentially lowering oil prices. In China, rapid electrification is driving oil demand to peak earlier, with imports at 11.4 million barrels per day in 2023 projected to plateau by 2026 and then decline, furthering the global supply surplus and pressuring prices downward.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Oil and Gas - US E&P industry is a 32-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #237, which places it in the bottom 6% of more than 250 Zacks industries.

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates challenging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry's position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group's earnings growth potential. While the industry's earnings estimates for 2024 have gone down 27.7% in the past year, the same for 2025 have fallen 26.5% over the same timeframe.

Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it's worth taking a look at the industry's shareholder returns and current valuation first.

Industry Underperforms S&P 500 & Sector

The Zacks Oil and Gas - US E&P industry has fared worse than the Zacks S&P 500 composite as well as the broader Zacks Oil – Energy sector over the past year.

The industry has moved down 1.8% over this period compared with the broader sector's increase of 5.3%. Meanwhile, the S&P 500 has gained 32.2%.

Industry's Current Valuation

Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of noncash expenses.

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 5.99X, significantly lower than the S&P 500's 17.30X. It is, however, above the sector's trailing 12-month EV/EBITDA of 3.35X.

Over the past five years, the industry has traded as high as 10.81X, as low as 3.29X, with a median of 5.99X.

4 Stocks to Consider

Civitas Resources: Based in Denver, Civitas Resources focuses on the DJ Basin in Colorado and the Permian Basin across Texas and New Mexico. With strong well returns and a valuable midstream component, Civitas is positioned for growth. The company has become a leading consolidator in the DJ Basin and offers substantial returns to shareholders, with a balanced production mix of 37% oil, 34% NGLs, and 29% natural gas.

The 2024 Zacks Consensus Estimate for Civitas Resources indicates 53.1% year-over-year revenue growth. With a Zacks Rank #3 (Hold), the oil and natural gas producer has a market capitalization of $5 billion. CIVI's shares have lost 20.7% in a year.

Northern Oil and Gas: Northern Oil and Gas' core operations are focused on three leading basins of the United States — the Williston, Permian and the Appalachian. The upstream operator employs a unique nonoperating business model, which helps it to keep costs down and increase free cash flow.

Carrying a Zacks Rank #3, the 2024 Zacks Consensus Estimate for NOG indicates 18.3% year-over-year revenue growth. Northern Oil and Gas delivered a trailing four-quarter earnings surprise of roughly 13% on average. The company's shares have gone up 15.1% in a year.

California Resources: It is a California-based independent oil producer with a strong focus on conventional, shallow oilfields, producing around 60% oil. Alongside its core E&P operations, CRC is expanding into carbon capture and storage. The company actively partners with CO2 emitters to permanently sequester CO2 in its depleted reservoirs, positioning itself as both an energy and carbon management leader in the state.

California Resources' expected EPS growth rate for three to five years is currently 11.8%, which compares favorably with the industry's growth rate of 8.3%. CRC delivered a trailing four-quarter earnings surprise of roughly 13.1% on average. The Zacks Rank #3 (Hold) company's shares have gained 13.4% in a year.

Amplify Energy: The Houston, TX-based operator has a strong presence in Oklahoma, Southern California and Texas, and has stakes such as Bairoil in the Rocky Mountains. Amplify Energy's diversified operations — spread over five U.S. basins — mitigates pricing and operational disruptions, while its long-life, long-production assets generate sustainable cash flows.

The 2024 Zacks Consensus Estimate for Amplify Energy indicates 3.1% year-over-year revenue growth. With a Zacks Rank of 3, the oil and natural gas producer has a market capitalization of $267.5 million. AMPY's shares have increased 19.6% in a year.

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