Tuesday, Credit Suisse upgraded Occidental Petroleum Corp. (OXY) and Noble Energy, Inc. (NBL) shares to Outperform from Neutral. The brokerage downgraded EOG Resources, Inc. (EOG) and Ultra Petroleum Corp. (UPL) shares to Underperform from Neutral.
Analyst Wolff is making tactical changes to his investment positioning, embracing a more favorable view of oil-focused E&Ps relative to natural gas weighted equities. Large cap oil in particular looks like good value having lagged gas peers significantly despite the strength in the oil curve and falling gas prices.
Gas equities look quite vulnerable to the analyst currently having already discounted a 2010 recovery despite substantial risks. The analyst thinks real questions have emerged about the speed of a gas cycle 'reset', amid stubbornly high U.S. production, high storage levels and weak demand.
Most importantly, the analyst said that production might not fall as fast as he has expected amid a wave of equity and debt financings ($14 billion+ year-to-date), which could lead to a higher rig count trough than most have expected. The analyst sees potential risk to his $6.50 per MMBtu NYMEX gas outlook for 2010.
The analyst's viewpoint on owning oil versus gas is partly explained by the strength in the 2010 oil curve (up 21% since March 1 to $67.59) vs. 2010 gas, which has held flat at ~$6.00 per MMBtu over that same time period. Both EOG and UPL look priced for a fast gas price reset and substantial future volume growth, which could be pushed off should low prices persist.
The analyst said that despite improving costs and good volume performance, OXY has suffered notably versus peers as investors have re-established beta in portfolios. NBL has lagged more recently, despite key exploration successes in Israel and the Gulf of Mexico. The analyst also continues to like Apache Corp. (APA) and Pioneer Natural Resources Co. (PXD) for oil leverage.
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