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Bear of the Day: Stone Energy


Crude oil prices have been on an incredible downward slide over the past few months. Prices are now in the range of multi-year lows and there is little near term hope for an upswing. After all, there are some significant forces at play in the oil market, making it difficult to see a move higher in 2015.

Reasons for Oil’s Slide

The stronger dollar has definitely had an impact, as oil is traded in dollars around the globe. So, when translated into foreign currencies, international producers need less to receive the same domestic value for each oil barrel sold.

Speaking of foreign markets, demand has also been pretty weak in a number of these segments, an area that was an important source of demand growth in the near term. And though many nations are resorting to more stimulus in an attempt to boost economies (and thus oil demand), many have had little impact so far, keeping a lid on oil prices in the process.

If that wasn’t enough, we have a huge oversupply situation back in the U.S. thanks to improving fracking technologies. This is further putting pressure on oil prices, making for a terrible situation for those long in crude oil in the near term.

With this backdrop, investors shouldn’t be too surprised to note that energy stocks have been at the bottom of the industry list, and have been seeing slumping earnings estimates as of late. One such stock that is a great example of this trend is undoubtedly Stone Energy (NYSE:SGY), a company that is in the exploration and production segment of the energy industry.

SGY in Focus

SGY is an independent oil and gas company, exploring and developing properties in the Gulf of Mexico as well as Appalachia. At the end of last year, SGY had proven oil and gas reserves of approximately 864 billion cubic feet of gas equivalent.

Given the trends outlined above, investors shouldn’t be too surprised to note that this has been a terrible business to be in as of late. In fact, SGY has seen its shares crash by over 50% in just the past six months, putting the company deep into bear territory.

But with such a huge drop in such a short time frame, investors might think that a reversal is at hand. However, if you look at recent earnings estimate revisions, you’ll see that there is little hope for a turnaround in the near term.

Earnings Estimate Revisions

Current year and next year estimates have crumbled in the past few months, as not a single estimate has gone higher for either time frame in the past two months. In fact, we have seen three go lower for each time period in the past two months, while there is a weak trend for the current and next quarters too.

For example, for the current quarter, the earnings consensus has crashed from 16 cents a share 30 days ago, to just four cents a share today. Meanwhile, over the past two months, the next quarter consensus estimate has been cut in half, from 28 cents to 14 cents a share.

 

 

 

 

 

 

Bottom Line & Other Choices

Given these cuts, SGY now has growth contractions of over 90% built in for the current quarter, and then a 75% contraction in earnings for the current year when compared to the year ago period. And with these numbers and the broad industry trend, it shouldn’t be too surprising to note that SGY has earned itself a Zacks Rank #5 (strong sell) and that more weakness could be ahead for this company in the near term.

Unfortunately, there arent many other options in the exploration and production sector, as the segment has an industry rank in the bottom 20%. Shockingly though, there are actually a few stocks that have a buy rank in this low sector, including Atlas Resource Partners (NYSE:ARP).

This small cap company has a Zacks Rank #2 (Buy) and has a double digit dividend yield to boot. So if you are desperate to stay in the E&P space, make sure to look at ARP in the near term, and especially when compared to the struggling SGY, which may continue to face extreme turbulence in the months ahead.

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