GPOR rated a Top Pick by JPMorgan

[dan_s]

I have talked to Range Resources (RRC). They tell me that several midstream projects come on-line in Q1 that will significantly increase netbacks in the Appalachian region. Plus, I am "cautiously" bullish on the overall U.S. natural gas market. If Joe Bastardi's weather forecast is correct (much colder in Q1) and LNG exports ramp up, we should get some rather bullish natural gas storage reports in the first quarter. Keep in mind that U.S. gas production is now on decline (see EIA's Drilling Productivity Report). AR has 100% of their 2016 gas production hedged at good prices. I do not agree with Arun's valuations of RRC or SWN. My valuation for SWN is $22.30/share, compared to First Call's price target of $17.56. - Dan

Arun Jayaram of JPMorgan initiated coverage of eight Appalachian-focused E&P companies with a "cautious outlook."
Jayaram noted consensus estimates on the group are too high, despite the group enjoying a "competitive resource advantage."
Nevertheless, the analyst named EQT Corporation (NYSE: EQT) and Gulfport Energy Corporation (NASDAQ: GPOR) as his top two picks in the space.

Marcellus Shale producers are "structurally advantaged," given the low-end of the U.S. natural gas cost curve and "vast inventories" of ready-to-drill locations, according to Arun Jayaram of JPMorgan.

In a report published Wednesday, Jayaram initiated coverage of eight Appalachian-focused E&P companies with a "cautious outlook." The analyst stated that despite having a "competitive resource advantage," Wall Street consensus forecasts for the group are too high as "weak" gas and NGL prices need to "reset" before "the stocks can work."

"While there are clear signs that production growth is finally beginning to plateau, headwinds for a ‘16 recovery include a significant chunk of volumes that are voluntarily curtailed in NE Pennsylvania (~800 MMcf/d) and a huge DUC inventory," the analyst explained. "On a relative basis, there is a much higher proportion of DUCs in the Marcellus than in any other U.S. basin, which we believe will keep a lid on pricing gains until this inventory is worked off, thereby pushing a potential recovery to 2017 or 2018."

Related Link: This Unconventional Metric Is The Key To E&P Outperformance
Top Two Picks
According to Jayaram, EQT Resources and Gulfport Energy are the two companies "best positioned" to navigate the "turbulent macro seas." The analyst cited the two companies "core of the core positions" with a "very strong" balance sheet, noteworthy resource catalysts and attractive valuations.

Jayaram noted EQT's cash cost structure of $1.11 per Mcfe is notably below the average of $1.64 per Mcfe for its peers. In addition, the company's total cost structure of $2.35 per Mcfe is 22 percent lower than the average of its Marcellus/Utica peers. Accordingly, its industry-leading cost structure is a "key competitive advantage" within the natural gas environment that could remain "challenged for many years."

Meanwhile, Gulfport Energy's positioning within the Utica Shale includes 160,000 net acres in the core of the dry gas window, providing the company with a "remarkable growth opportunity" over the next 10-plus years. In addition, the company has the ability to quickly ramp production volumes, if doing so were justified by higher commodity prices.

Shares of EQT were initiated with an Overweight rating and $69 price target.

Shares of Gulfport were initiated with an Overweight rating and $30 price target.
Other Initiations And Price Targets
Shares of Antero Resources Corp (NYSE: AR) were initiated with an Underweight rating and $19 price target.

Shares of Cabot Oil & Gas Corporation (NYSE: COG) were initiated with a Neutral rating and $20 price target.

Shares of Eclipse Resources Corp (NYSE: ECR) were initiated with a Neutral rating and no assigned price target.

Shares of Range Resources Corp. (NYSE: RRC) were initiated with a Neutral rating and $29 price target.

Shares of Rice Energy Inc (NYSE: RICE) were initiated with a Neutral rating and $14 price target.

Shares of Southwestern Energy Company (NYSE: SWN) were initiated with a Neutral rating and $8 price target.