Energy stocks rose Wednesday after a swath of oil-and-gas companies reported earnings that topped expectations and after Colorado voters rejected limits on fracking.
Cimarex Energy Co.
Pioneer Natural Resources Corp.
and Devon Energy Corp.
were the biggest gainers in the energy sector after the companies reported better-than-expected results this week.
Top gainers also included Anadarko Petroleum Corp.
and Noble Energy Inc.
companies that have extensive holdings in Colorado oil fields.
“The oil-and-gas industry collectively breathed a sigh of relief due to the failure of Proposition 112,” analysts at Simmons wrote in a note Wednesday, referring to a failed proposition on Colorado’s ballot that would have increased minimum drilling setbacks from homes and businesses as well as areas designated as vulnerable, such as waterways and parks.
“What started as a grass-roots ballot initiative has wreaked havoc on the (Denver-Julesburg Basin) equities since early August,” they said, citing Anadarko and Noble as well as SRI Energy Inc.
as the companies in their coverage with the most leverage to the DJ Basin, which is north of Denver.
Analysts at S&P Global Platts said the new setback requirements would have banned most new drilling in the DJ Basin, and they estimated that the local oil-and-gas industry poured more than $30 million in defeating the measure, compared with $1 million by supporters.
Proposition 112 would have caused Colorado’s oil production to decline 54% from current projections, and gas output to fall 45% from the current outlook, the analysts said.
Elsewhere, voters in California and Missouri rejected gasoline tax increases and Washington state voters rejected a carbon fee that would have raised costs for refineries, natural gas-powered power plants, and other larger users, the S&P Global Platts analysts said.
The possibility that Proposition 112 returns in some form in the next election cycle “is non trivial,” the Simmons analysts said.
They expected companies such as Noble and Anadarko to shift money toward other regions, and said the risk premium for the DJ-levered companies “could remain relatively elevated relative to other basins and culminate in lower multiples.”
Noble stock got another boost on Wednesday after analysts at Tudor Pickering Holt upgraded their rating on the shares to buy from hold, saying they were moving off the sidelines after the “overdone” underperformance has set up a favorable risk/reward equation.
They also cited the defeat of Proposition 112 as factoring in their decision to re-rate the shares higher.
“(Noble) was already pricing in the worst,” and even if “onerous regulatory measures were to eventually be implemented, NBL’s Q3 conference call highlighted the company’s vast opportunity set across the portfolio,” the Tudor Pickering Holt analysts said in a note.
Meanwhile, Cimarex, Pioneer Natural, and Devon handily beat analyst expectations when they reported their third-quarter earnings on Tuesday.
Cimarex reported adjusted per-share earnings of $1.99 a share on sales of $592 million, compared with expectations of an adjusted EPS of $1.56 on sales of $560 million, according to FactSet.
The earnings beat was driven by higher production and realizations “across all commodity streams” as well as lower lease expenses, analysts at Jefferies said in a note.
Pioneer earned an adjusted EPS of $2.07 a share on sales of $2.5 billion in the third quarter, versus expectations of an adjusted profit of $1.68 a share on sales of $1.3 billion, according to analysts surveyed by FactSet.
Production in West Texas’s Permian Basin drove the outperformance and the “solid quarter” for Pioneer, Tudor Pickering Holt analysts said in a separate note. Pioneer “will need more than one quarter of solid execution to establish a new track record, overall we think Q3’18 is a good start,” analysts at Barclays said.
Devon reported an adjusted EPS of 65 cents a share on revenue of $2.6 billion, surpassing expectations of a non-GAAP EPS of 42 cents a share on sales of $1.6 billion.
Stronger oil and natural-gas liquids price realizations and better-than-expected per-unit cash operating costs and general expenses drove the beat, the analysts at Barclays said in a separate report.
Energy stocks on the S&P 500
rose 0.8% on Wednesday, compared with gains of 1.5% for the index. The sector has lost more than 3% this year, versus gains of 4.6% for the index.