The hatred for oil and gas stocks may be at a multiyear high, rivaling the hideous days back in 2016 when oil collapsed to the mid-$20s. I find that so odd given that oil seems to have found its footing in the $40s and many of our companies are profitable at these levels.
Wall Street may be blind to the profitability levels and the values that are being created by the downturn, but the companies themselves aren't. That's why we should sit up and take notice of the big deal announced this morning, EQT (EQT) buying Rice Energy (RICE) for $6.7 billion, giving Rice shareholders a 25% gain in today's trading.
I think the biggest values are being created by the fantastic oil drilling techniques in the Permian, the ones that are producing oil in the $30s all in, a nice profit with oil in the $40s.
But this deal unites two powerful forces in the Marcellus and Utica shales, with EQT consolidating 187,000 acres of the Marcellus and 65,000 acres of Utica, a shale I visited a few years back in Ohio and all I can say is WOW! With natural gas at $3, a dollar above where it was last year, and Rice's $1.12 all-in price, this is a remarkable deal that will make fortunes for EQT shareholders.
There was a time when this natural gas would have been landlocked. Now, however, there are pipelines to the east to replace retiring coal and nuclear power plants and pipelines to the south for export and manufacturing. The pipelines to the south are reverse operations. They were built to transport imports and Southern natural gas but are now set up in the other direction, a true triumph of our exploitation of what many say is the largest natural gas field outside of Qatar.
For the record, if there is to be more consolidation, and I think there will, Cabot Oil and Gas (COG) , with similar all-in costs for natural gas, will likely be the center of attention and Southwestern (SWN) , a total down-and-outer that's centered in natural gas, is a natural target.
To me, the better values remain in the Permian. We have been buying Apache (APA) for Action Alerts PLUS because it is immensely profitable with oil at $44 and it has what could be the largest natural gas find in the country in years, the Alpine High play. Most investors have soured on it after the company promised big and has yet to show any real development that would indicate how big the find is. No matter, the stock is now below where it was when Alpine High was announced.
Another company with potential is the other FANG, the symbol for Diamondback Energy, which has cratered from $115 to $85.
Why does everyone hate oil and gas so much? Because the group is largely viewed as a destroyer of performance, and any speculation in the patch has been a nightmare for anyone who has ventured into it, a virtual roach motel for portfolio managers.
This EQT-for-Rice deal shows you portfolio managers can shun the group all they want. It just creates the values that are obvious to the companies themselves.