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Group remains conservative to oil, gas industry
By Karl Henkel
YOUNGSTOWN
Television ads and talking heads spew the virtues of shale drilling across America, but at least one group remains conservative to the booming oil-and-gas industry — research analysts.
During the past week, several big players in the shale industry have had their shares downgraded by equity-research analysts.
The biggest — Oklahoma City-based Chesapeake Energy Corp. — was downgraded from “hold” to “sell” by Argus research because of skepticism surrounding the company’s “ability to lower debt and slow spending.”
Chesapeake is America’s second-largest producer of natural gas, and has scooped up thousands of land leases here in the Mahoning Valley.
This follows a third-quarter earnings report, where Bob Brackett at research firm Sanford C. Bernstein put Chesapeake’s funding gap next year at between “$3 billion and $5.5 billion.”
A funding gap is the amount of money not on hand, but needed to fund operations.
Range Resources, a major driller in the Marcellus Shale region in Pennsylvania, had its shares downgraded from “neutral” to “underperform” by Zacks Investment Research.
ZIR cited “several stringent regulations” and the fact that a “drilled well may not produced the estimated quantity” for its rating.
Analysts at Robert W. Baird downgraded ECA Marcellus Trust from “neutral” to “underperform.”
ECA has royalty interests in 14 Marcellus Shale horizontal gas wells and 52 horizontal natural gas development wells that will soon be drilled.
Equity-research analysts also downgraded Carrizo Oil & Gas, Enerplus Resources Fund and QR Energy LP.
Robert Gardner, CPA and financial adviser with Stifel, Nicolaus & Co. Inc., Butler Wick Division in Canfield, said analysts use a handful of factors to determine grades for companies.
“Research firms might start with a top-down approach, meaning they study the global macroeconomic, demographic and even political landscape before drilling down to the specific sector and [the] economic cycle the company is in,” he said. “The analysis would then go further by analyzing both a company’s fundamentals [such as sales, earnings, etc.] and technical [stock chart, key support and resistance levels].”
The downgrades come just a few short months after the United States Geological Survey downgraded natural-gas prospects for the Marcellus Shale by nearly 80 percent, from 410 trillion cubic feet to 84 trillion cubic feet. That is still greater, however, than expectations a decade ago.
Investors are still awaiting more concrete results about the Utica Shale’s production rates.
So far, Chesapeake has only released peak rates for four of its Utica wells, and although the results were promising, experts say it gives little indication of long-term success.
“What I really want to know — and Chesapeake will eventually have to release this — is there a sustained production rate and the rate of decline,” said Jeffrey Dick, Youngstown State University geology department chairman, in an interview with The Vindicator after Chesapeake released its peak-production rates.
Dick said the rate of decline in Marcellus Shale wells fell “very quickly,” but Utica Shale drilling could be different, because of the rock’s mineral composition and thickness. It’s deeper below the ground’s surface.
Chesapeake will make known complete drilling information in March.