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The Fundamental Problem for Energy Shorts (HP, MTDR, AGYP, SM)

By: OTC

The title makes the crucial point: The Oil bull market is resting firmly on “fundamental” ground. While it has clear technical tailwinds in terms of commodity investment advisor trend signals, and while it is sailing on a sea of the central bank and fiscal stimulus, the main factor driving oil prices higher – and oil stocks in tow – is good ol’ fashioned supply and demand.

It all starts with the oil crash last year in April. WTI crude hit negative-forty-dollars per barrel. That’s never happened. People actually paid you to take control of barrels of oil (for about a day, anyways).

This was a consequence of the sudden heart-attack-like shutdown in the global economy in response to the onset of the Covid-19 pandemic health crisis. In a commodity market, those sorts of events leave traumatic scars that take time to heal.

Managers, boards, investors tied to the oil industry were roasted and flayed. For months afterward, most were reluctant to even turn the pumps back on for fear that another surge in the virus would force the resumption of lockdowns. The fear of same kept new investment capital from touching the oil industry throughout the rest of 2020.

Fast forward a few months, and here we are on the verge of a complete reopening fueled by faster-than-expected vaccinations and better-than-expected economic performance. Policymakers aren’t removing the punchbowl, OPEC+ just decided to avoid speeding up production hikes, and major oil producers continue to avoid investing in new production capacity as they take their sweet time with opening the spigots back up. All the while, oil trends ever higher.

This is a classic commodity bull market. And it could have significantly further to go, which may translate into a major opportunity in stocks in the oil production space.

There are some obvious places to turn, such as Diamondback Energy Inc (NASDAQ: FANG) or ETFs like the VanEck Vectors Oil Services Etf (NYSEARCA: OIH) or United States Oil ETF (NYSEARCA: USO). But there may be more powerful opportunities to find by looking a bit further under the radar.

With that in mind, we take a look at some of the most interesting stocks tied to the idea of non-integrated sourcing of new oil supply, including Helmerich & Payne Inc (NYSE: HP), Matador Resources Co (NYSE: MTDR), Allied Energy (OTC US: AGYP), and SM Energy Co (NYSE: SM).

 

Helmerich & Payne Inc (NYSE: HP) designs, fabricates, and operates high-performance drilling rigs in conventional and unconventional plays around the world. H&P also develops and implements advanced automation, directional drilling, and survey management technologies.

As of March 31, 2021, H&P’s fleet included 242 land rigs in the U.S., 32 international land rigs, and seven offshore platform rigs.

Helmerich & Payne Inc (NYSE: HP) recently reported earnings for its latest quarter, including news that H&P’s North America Solutions segment exited the second quarter of fiscal year 2021 with 109 active rigs up roughly 15% during the quarter, the Company ended the quarter with $562 million in cash and short-term investments and no amounts drawn on its $750 million revolving credit facility culminating in approximately $1.3 billion in available liquidity, and Quarterly North America Solutions operating gross margins increased $19 million to $64 million sequentially, as revenues increased by $48 million to $250 million and expenses increased by $29 million to $186 million.

President and CEO John Lindsay commented, “The increase in activity we experienced during the first half of our fiscal 2021 year has been encouraging, particularly in light of the record industry downturn last year. As in the past, our strong market standing and flexible financial position are enabling us to concentrate on long-term, strategic objectives during volatile and uncertain markets. We are making good progress in deploying digital technology solutions and introducing new commercial models to the industry, but realize there is still a lot of work ahead of us.”

If you’re long this stock, then you’re liking how the stock has responded to the announcement. HP shares have been moving higher over the past week overall, pushing about 17% to the upside on above-average trading volume. Shares of the stock have powered higher over the past month, rallying roughly 20% in that time on strong overall action.

Helmerich & Payne Inc (NYSE: HP) generated sales of $296.2M, according to information released in the company’s most recent quarterly financial report. That adds up to a sequential quarter-over-quarter growth rate of 20.2% on the top line. In addition, the company has a strong balance sheet, with cash levels far exceeding current liabilities ($610.2M against $251.6M).

 

Matador Resources Co (NYSE: MTDR) is an independent energy company engaged in the exploration, development, production, and acquisition of oil and natural gas resources in the United States, with an emphasis on oil and natural gas shale and other unconventional plays.

Its current operations are focused primarily on the oil and liquids-rich portion of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. Matador also operates in the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana.

Matador Resources Co (NYSE: MTDR) recently discussed its plan to increase oil production in 2021 to generate additional cash flow. The company projects this year’s total oil production in the range of 17.2 to 17.8 million barrels, suggesting a 10% year-over-year improvement.

In addition, the company’s focus on capital efficiency should help the bottom line. This year, MTDR projects drilling and completion costs for operated horizontal wells turned to sales to plunge roughly 14% year over year. It is also looking to initiate dividend payments this year, which will help to drive investor interest in a virtuous circle in a rising oil price context.

If you’re long this stock, then you’re liking how the stock has responded to the announcement. MTDR shares have been moving higher over the past week overall, pushing about 12% to the upside on above-average trading volume. Shares of the stock have powered higher over the past month, rallying roughly 20% in that time on strong overall action.

Matador Resources Co (NYSE: MTDR) pulled in sales of $336.2M in its last reported quarterly financials, representing top-line growth of 49.9%. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($48.3M against $376.4M, respectively).

 

Allied Energy (OTCMKTS: AGYP) is another smaller cap play in the space with an interesting angle on providing value that could multiply as the price of oil rises.

The company specializes in the business of reworking and re-completing existing oil and gas wells located in mature oil and gas producing fields across the United States, with the objective of mobilizing its expertise and technology to drive higher production volumes, longer well life, and more efficient recovery of proven and available oil and gas reserves in acquired wells.

Allied Energy (OTCMKTS: AGYP) recently announced that it has leased 300 acres containing five additional oil wells in Crystal Falls, Texas identified as part of the Annie Gilmer Lease.

According to its release, the Annie Gilmer lease is in the small community of Crystal Falls, Texas on the banks of the Clear Fork of the Brazos River, approximately thirty miles north of the town of Breckenridge, Texas. There a total of five wells drilled on the lease, which is approximately 300 acres. There are five wells on the lease that were drilled to the Mississippi formation that is encountered at approximately 4100′ below the surface of the earth. The Mississippi formation, when caught on a good geologic structure can produce prolific oil and gas cumulative numbers. There were six wells drilled on the lease starting in the mid 70’s with the last being drilled in 1989. Since the initial well, the lease has produced over five hundred thousand (5000,000) barrels of high gravity oil and over five hundred million (500,000,000) cubic feet of very rich natural gas. There are two permitted saltwater injection wells on the lease. One of the injection wells will be re-converted to an active oil and gas producer.

Allied CEO George Montieth elaborated on the acquisition: “We are thrilled to add the Annie Gilmer Lease wells to our ever-expanding portfolio of Texas oil wells. Allied currently has a crew on the ground this week at this new location and expects to release flow rates, videos, and other pertinent data shortly. Investors can also expect updates about our Green Lease location as the workover rig is now just waiting on weather to move onto the lease.”

We should also point out that the acquisition was non-dilutive, according to the company’s release.

Allied Energy (OTCMKTS: AGYP) shares have been in a sturdy upward trend over the past six months as the company ramps up its operations. However, it has also seen a good deal of corrective and consolidative action since February, suggesting that it could be time for a fresh move now that strong support in the $0.25 area has repeatedly held up to the tug-of-war between accumulation and distribution.

 

SM Energy Co (NYSE: SM) bills itself as an independent energy company engaged in the acquisition, exploration, development, and production of oil, gas, and NGLs in the state of Texas.

The company recently announced operating and financial results for the first quarter 2021 and provided certain second quarter 2021 guidance, including net cash provided by operating activities of $105.6 million before net change in working capital of ($51.4) million totaling $157.1 million. Adjusted EBITDAX, (a non-GAAP measure reconciled below) was $215.0 million.

Chief Executive Officer Herb Vogel comments: “While unprecedented first-quarter weather presented exceptional challenges, the SM Energy team prioritized safety, collaborated with suppliers and we are back on track toward achieving our long-term objectives. We remain focused on key priorities of generating free cash flow, reducing absolute debt, and demonstrating top tier ESG stewardship, and we maintain our full-year guidance for production, capital expenditures, and generating free cash flow.”

If you’re long this stock, then you’re liking how the stock has responded to the announcement. SM shares have been moving higher over the past week overall, pushing about 38% to the upside on above-average trading volume. Shares of the stock have powered higher over the past month, rallying roughly 48% in that time on strong overall action.

SM Energy Co (NYSE: SM) generated sales of $443.8M, according to information released in the company’s most recent quarterly financial report. That adds up to a sequential quarter-over-quarter growth rate of 38.6% on the top line.

 

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