Range Resources (RRC) – $8B market cap – Technical: The stock reclaimed its 100- and 200-DMA on high volume. Aggressive entry can be
considered as it has cleared resistance near the middle of the base at $31.6. An ideal entry point is on a break above the pivot of the consolidation base ($37.9, +13). Fundamental profile: EPS Rank is weak at 8 due to lower price realizations in FY23. SMR Rating is solid at B, with strong growth estimates for FY25. Improving technical profile: RS line has sharply improved in the past two weeks, with RS Rating improving to 65 from 24 in the same period. A positive turn in A/D Rating and a solid Up/Down Volume ratio of 1.2 denote the return of buying interest. Company Description: Range Resources is among the top 10 producers of natural gas and natural gas liquids (NGLs) in the U.S. The company’s operations are focused on stacked-pay projects in the Appalachian basin, particularly in the Marcellus Shale in Pennsylvania. Recent Natural Gas Market Update: Natural gas prices appear to be bottoming out after declining to a three-and-a-half-year low on concerns about warmer-than-expected weather and increasing production. Prices surged more than 10% yesterday after producers like Antero Resources (AR) and Chesapeake Energy (CHK) announced scaling back on their FY24 production. Fundamentals: RRC has a huge reserve base, translating to more than 22 years of production life at the FY22 run rate. Undeveloped reserves make up ~40% of the total reserves. It has ~520K net acres in the Marcellus region, providing 30+ years of drilling inventory. The company possesses peer-leading capital efficiency, maintaining the lowest maintenance capex per unit of production in the country. This is due to its large contiguous acreage, which provides operational advantages. Beat Q4 FY23 results: Revenue declined 28% y/y to $715M, beating estimates by 6%. Average oil production was up 7% y/y, beating estimates by 1%, while gas price realization was lower than consensus. Adjusted EPS of $0.63 (-52% y/y) beat estimates by 31%. Looking forward: For FY24, the company targets to hold production flat for the year at 2.1–2.2 Bcfe per day.
Author: Kenley Scott
Kenley Scott is a senior equity analyst and sector strategist covering the APAC region and the Energy sector. He is a member of the Global Focus List Committee, which approves all equity recommendations for developed, emerging, and frontier markets. Kenley also writes the Global Sector Summary, part of the Sector Strategy service, which identifies emerging sector strength and weakness across 46 countries every week. After working as a commodities broker, Kenley joined the firm in July 2006. He has a B.S. in Statistics from the University of California, Riverside and also holds a Series 65 securities license.
Global Sector Strategy
Key Points:
- Over the trailing one year, Technology holds a commanding lead over all other sectors. Retail is the closest, but still trails by 20%. The lead over the remaining nine sectors is 30–60%.
- Given the outsized Tech weighting of the S&P 500, nearly all sectors are lagging by historical extremes over one year.
- Basic Material: 21% lag, has been worse in 6% of all weeks. Negative in 2024.
- Capital Equipment: 7% lag, has been worse in 8% of all weeks. Neutral in 2024.
- Consumer Cyclical: 15% lag, has been worse in 7% of all weeks. Negative in 2024.
- Consumer Staple: 27% lag, has been worse in 2% of all weeks. Negative in 2024.
- Energy: 25% lag, has been worse in 9% of all weeks. Negative in 2024.
- Financial: 15% lag, has been worse in 7% of all weeks. Neutral in 2024.
- Health Care: 14% lag, has been worse in 9% of all weeks. Positive in 2024.
- Transportation: 16% lag, has been worse in 7% of all weeks. Negative in 2024.
- Utility: 36% lag, has been worse in <1% of all weeks. Negative in 2024.
O’Neil Energy/Material Weekly
Diamondback Energy (FANG) announced that it would acquire privately-held Endeavor Energy Partners for $26B in cash and stock. The deal includes $8B in cash and about 117M shares of Diamondback, which would retain ~60% ownership in the combined entity. The deal comes with approximately $550M in annual synergies and ~10% cash flow accretion by 2025. Combined 2024 production is expected at 808-831 MBOE/d. Diamondback will change it expected return of cash to shareholders from 75% prior, to 50%. It also raised its base dividend by 7% for Q4 2023, to $3.60/share. The stock has posted a huge breakout on the weekly chart following the announcement, as the market likes the combined potential. It will be the third-largest producer in the Permian region behind Exxon Mobil (XOM) and Chevron (CVX). See weekly chart below.
Global Sector Strategy
Key Points:
- Small/midcap indices picked up to end the week, particularly on the growth side. Mid growth with full breakout and small growth testing December peak.
- After surging breakout totals in December, pause for a few weeks to start the year. Last week, totals jumped again, with ~2x the long-term average.
- Incorporating the December period as well, about 27% of stocks above $500M market cap have broken out. Industrials, Technology, and Cyclicals have the best totals.
- Of these, here are the percentages by sector of stocks that remain above their pivot.
O’Neil Energy/Material Weekly
Union Pacific (UNP) – $152B market cap – Technical: The stock has cleared a four-week, tight area and is trading constructively
along its rising 10-WMA. Next resistance is near 2022 highs ($279; +12%). Moderate fundamental profile: EPS Rank 66, Composite
Rating of 79, SMR Rating of B and accelerating EPS growth estimates for FY24 and FY25. Strong technical profile: RS line has been
trending upward since June 2023 with a good RS Rating of 82. Up/Down Volume ratio of 1.2 and A/D Rating of B denote buying
O’Neil Energy/Material Weekly
Scatec (SCAT.NO) – $1B market cap – Technicals: The stock is forming the right side of a stage-one cup-with-handle base.
Accumulate on a break above the pivot of NOK 83 (+5%). Fundamental profile: EPS Rank 41 and SMR Rating of C are expected to
improve, aided by a declining interest rate environment and prudent cost savings. Improving technical profile: RS line has recovered
sharply from its January lows. RS Rating improved to 78 from 49 in the past two weeks. Up/Down Volume ratio of 1.2 and A/D Rating
of B denote accumulation.
O’Neil Energy/Material Weekly
Arabian Drilling (ARD.SA) – $5B market cap – Technical: The stock is breaking out of a stage-three cup-with-handle base on above
average volume. Pivot range of SAR 202.8–212.9. Solid fundamental ratings, with an EPS Rank of 85, a Composite Rating of 90, and
an SMR Rating of B. Excellent technical profile: RS Rating is high at 84, while RS line has been consolidating sideways for the past
three months. Up/Down Volume ratio has increased to 1.5 from 0.6 in the past month, coupled with an increasingly positive A/D
Rating, denoting accumulation. Company Description: Arabian Drilling is the largest oil and gas drilling company in the Kingdom of
Saudi Arabia (KSA). As of FY22, the company had a total fleet of 50 rigs, including 38 onshore and 12 offshore rigs. Following its IPO
in November 2022, ~36% of the company’s shares are held by TAQA, backed by PIF, and about 34% of the ownership is with
Schlumberger (SLB). Its clients include Saudi Aramco and Baker Hughes (BKR). It generates all its sales from the Middle East.
Fundamentals: Arabian Drilling is the market leader in the KSA, with a ~17% market share in terms of the total number of rigs. It is
the second-largest onshore player, with a ~19% market share, and the third-largest offshore company, with a ~12% share. The
company is a beneficiary of the Kingdom’s growing E&P capex at a CAGR of 13% through FY25 to support increased production in
the MENA region. The cost competitiveness of production in the Kingdom is likely to lead to increased drilling concentration in the
region by 2030. As of Q3 FY23, the company has a record order backlog of SAR 12.7B, equivalent to ~5x its FY22 sales, with an
average remaining contract tenure of 2.5 years per rig, providing multi-year revenue visibility. Good Q3 FY23 Results: Revenue grew
16% y/y to SAR 920M, beating estimates by 2%, led by increased rig activity and higher prices. Fleet utilization was 94% during the
quarter. EBIT rose 15% y/y to SAR 206M. EPS was flat y/y as operating income was offset by higher finance costs. Looking forward:
For FY23, the company has guided for revenue to be between SAR 3.3B and SAR 3.5B (+26% y/y). The street expects FY24 and
FY25 EPS to grow 37% and 19%, y/y, respectively.
Global Sector Strategy
Key Points:
- Fourth year of the presidential cycle is a decent one for stocks on average, although nothing close to the exceptional third year gains.
- End of mid-terms, which typically result in losses for the party that holds the presidency, and tendency for lack of policy changes may be among reasons for a strong third year.
- Election year brings some volatility with indices averaging minor gains for the first nine months of the year (mostly coming in Q2). Market tends to pick up in Q4 with outsized gains from smallcaps.
O’Neil Energy/Material Weekly
Gtt (GTT.FR) – $5B market cap – Technical: The stock broke out of a stage-one cup-with-handle base in October 2023. It has emerged out of a
three-week, tight area, reclaiming its 21- and 50-DMA and has re-entered the pivot range. Excellent fundamental profile: EPS Rank 87,
Composite Rating of 99, and best-possible SMR Rating of A.
Global Sector Strategy
Key Points:
- 2023 led Nasdaq 100 up 54% for the year. Lagging Russell 2000 Value and Equal-weight S&P 500 were up 12%.
- Last three months were much more balanced, with all indices up between 10% and 15%.
