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After significantly lagging the market for the past couple of years, it is becoming pretty obvious to many across Wall Street that energy may be one of the hottest sectors going forward. The oil glut in storage that hung over the market for years has largely been cleared, and most feel that production in the United States will peak this year.
When you add up that production outside of the United States has plummeted, there is geopolitical instability in the Middle East and South America, and use has not dropped, the price could be going higher, much higher. In a new report, SunTrust raises its price targets for oil for this year and 2019. The report noted this:
We forecast oil prices to remain strong ($55+ per barrel) provided the Joint OPEC-Non-OPEC Ministerial Monitoring Committee (JMMC) continues its ~1.8 million barrels of oil per day voluntary production cut, US production growth is less than 750,000 barrels per day for the remainder of the year, and potential new tariffs on China remain at least reasonable. As such, our new price deck increases 2018 oil price by ~14% to $66.46 a barrel (little change to natural gas price) and increases 2019 oil price by ~4% to $63.40 a barrel (little change to natural gas price).
We screened the SunTrust energy sector coverage universe for stocks rated Buy and found five that look like great plays heading into the busy summer driving season.
This is a top play for investors looking to the Permian Basin. Cimarex Energy Co. (NYSE: XEC) is an independent exploration and production company. Its primary activities are in the Mid-Continent and Permian Basin areas of the United States.
The company is focused on increasing shareholder value through strategies linked to generating attractive economic returns on capital employed and profitable growth in per-share reserves, production and cash flow. It intends to profitably grow reserves and production through a balanced mix of exploration, exploitation and acquisitions.
Cimarex has a diversified base of high-quality production and attractive drilling opportunities. It should be noted that hedge funds have initiated sizable new positions in the company over the past year, and like its brethren in the Permian, many consider the company a very solid takeover target.
Investors receive just a 0.67% dividend. The SunTrust price target for the stock is $130, and the Wall Street consensus target is $135.94. The shares closed Monday at $96.72.
This is a top Permian Basin play for more aggressive accounts and is a top pick across Wall Street. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.
Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow, but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.
SunTrust has a $165 price target, and the consensus target is $155.82.
This lesser known company is a solid play for those looking for Permian Basin exposure at a reasonable price. Energen Corp. (NYSE: EGN) is a pure-play Permian operator with 147,000 net acres in the basin. The majority of its development activity targets the Midland and Delaware Basin, where the company holds 87,000 and 60,000 net acres respectively. Energen also holds an 84,000 net acre position in the Platform area where minimal capital investment is expected.
Top analysts feel that Energen is a rare breed, with strong debt-adjusted growth, inventory depth from a quality and blocky Permian footprint, balance sheet and value. Recent Generation 3 completions show promise for a step-change in well productivity, and none of that appears baked into guidance or street estimates.
SunTrust has an $85 price target. The consensus target is $65.07.
This is smaller capitalization stock for aggressive investors to consider. Parsley Energy Inc. (NYSE: PE) is an oil and gas producer with 227,000 net acres in the Permian Basin. The majority of acreage sits on the Midland side of the basin, but the company also holds a small acreage position in the Delaware Basin.
The company had 222 million barrels of oil equivalent of proved reserves at the end of 2016, of which 61% was oil. Through strategic acquisitions and acreage swaps, it has grown its acreage position since its initial public offering and has over 7,900 horizontal locations across multiple prospective zones.
The company is catalyst rich and a Permian Basin pure play. Parsley Energy has some of the strongest wells in the basin, generating returns that are among the best in the industry. It is also rapidly de-risking its drilling inventory and is well-positioned to continue to beat its strong growth projections.
The $38 SunTrust price target compares with a $37.85 consensus price target.
Pioneer Natural Resources
Many Wall Street analysts love this stock for a pure crude oil play. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.
Pioneer is a huge player in the Permian Basin and the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain a top player in the Permian as it expects to deliver solid production growth in 2018 and beyond.
The company’s unmatched depth of low-cost inventory and balance sheet allow it to compete favorably in both mild and moderate recovery case scenarios. In addition to asset and financial strength, many analysts feel that Pioneer offers the second highest multiple contraction among the large-cap Permian pure-play peers, as well as the highest free-cash-flow yield.
Investors receive a 0.05% dividend. SunTrust has set its price target at $235, while the consensus figure is $220.65.
These five top stocks to buy all make good sense for investors looking to add energy, especially companies with Permian Basin exposure. The recent selling is still offering some timely entry points for investors with a long-term horizon, and with oil potentially going higher, now is the time to add or initiate positions.