2 Energy Companies That Can Weather the Storm
The durable competitive advantages of undervalued Continental Resources and Cabot Oil & Gas should drive strong returns on capital over the long term.
David Meats: Morningstar's energy team has awarded narrow moat ratings to several firms in the beleaguered exploration-and-production segment. It might seem counterintuitive to maintain these moat ratings given that oil and natural gas prices are stuck at once-in-a-generation lows. But moat ratings are not cyclical. Severe commodity-price headwinds do not preclude best-in-class operators from earning moat ratings if they can still generate significant value in the long run. Therefore, our midcycle price forecast plays a much bigger role in our moat analysis than current prices do.
Right now, we estimate that the marginal cost of supply is around $64 per barrel for WTI and $4 per thousand cubic feet for natural gas. At these levels, we believe a handful of elite E&P firms are more likely than not to generate sustainable excess returns on capital for at least 10 years, satisfying the requirement for a narrow moat rating.
Dave Meats does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.