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Shares of SM Energy Surge on Analyst Upgrade

By Tyler Crowe - Feb 3, 2021 at 12:58PM

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Is the upgrade truly about a better business or a bet on oil prices?

What happened

Shares of independent oil and gas producer SM Energy (SM 6.01%) were up as much as 10.8% in early morning trading and are up 8.4% as of 11:30 a.m. EST today. The surge in price comes after analysts at JPMorgan upgraded the stock from underweight to neutral.

So what

This is a bit of an oversimplification, but analyst ratings on oil and gas producers change for two reasons:

  1. A material change in their business occurs, such as a debt reduction or an acquisition.
  2. The analyst rating the stock has changed his or her outlook on oil prices.

Based on the analyst note that accompanied the upgrade, it appears that this change was for the latter reason. The analyst note said that this upgrade was due to a change in his models for oil prices and a more favorable outlook for companies with acreage in what's being called the Austin Chalk formation in South Texas. 

Now what

There are two things to consider if you're a long-term investor. One is that analyst upgrades and downgrades may not necessarily align with your goals and timeline.

An analyst can upgrade or downgrade a stock several times in a year, and the measuring stick they tend to use is in months or quarters. So whenever you see a stock rating change, you should take them with a grain of salt because they may not necessarily reflect what you want out of your investment.

Two drilling rigs in the field.

Image source: Getty Images.

The other thing to think about, specifically regarding SM Energy, is that this is an upgrade to neutral -- which means that even with higher oil prices, analysts are saying "meh" about this stock.

There are some things that might make SM Energy attractive. It has eked out free cash flow over the past 12 months. Considering oil prices lately, this could be a sign that the company is keeping costs in check. It also doesn't have any acreage on federal land, so there are few concerns about getting drilling permits or being affected by other moratoriums that would prevent it from monetizing its assets.

That said, it's still a small independent oil and gas producer. That means no matter what the company does, the fate of its stock is tied to the price of hydrocarbons in the future.

Betting on oil prices rising is incredibly speculative and doesn't lend itself to long-term wealth creation. If you're looking at SM Energy's stock, know that it's much more likely to be a levered bet on rising oil and gas prices than a true long-term investment. 

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