Short Interest in Oil at Record Highs: Buy These 4 Stocks for a Big Move Up

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One would think that investors that are short oil would have cleared some of that position as the move off the February lows to briefly into the $50s was a strong 100% jump. The fact of the matter is that, according to the investment strategy team at RBC, the short position in West Texas Intermediate (WTI) recently eclipsed the record high levels set earlier this year, and while there is still a supply glut around the world, many feel that oversupply will be worked off by the summer of 2017.

In an outstanding research piece, the RBC team go right to the heart of the current situation and, while acknowledging that the current glut does indeed remain, they also have this to add:

With many of the large and previously unknown bearish risks to the market now known, we believe that the risk/reward profile appears asymmetrically skewed to the upside as improving fundamentals begin to overrule the recent weak sentiment. Despite the global supply overhang, aggregate OECD stocks excluding the US have actually drawn down marginally so far this year, and there have been meaningful storage draws in several Non-OECD countries.

So what should investors do? Own a combination of integrated leaders and add in Permian Basin companies that are nimble and doing an outstanding job in keeping costs low. We found four top stocks to Buy that fit this overall profile. They are well off highs set earlier in the summer, and are outstanding picks for long-term growth accounts. They are also all rated Buy at the top firms we cover on Wall Street.

Chevron

This stock is very solid story for investors looking to stay long the energy sector, and it is a preferred U.S. company to own now. Chevron Corp. (NYSE: CVX) is an integrated oil and gas company with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals. It sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas (LNG). Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.

The company’s Permian Basin assets are a goldmine, and that the Australian LNG business will transition from a yearly $8 billion capital consumption drag to a $2 billion to $3 billion contributor. Combined with the much lower overall capital spending for the 2016 to 2018 period, the company is poised to not only hang around, but end the sector slump in a much better position. The analysts note the Permian acreage is profitable at $40 a barrel.

Jefferies hosted a meeting with the company’s CEO, John Watson, in the spring. He made it clear that preserving the dividend for investors is the top priority. Jefferies also points out that although the company trades in line with its peers, the growth potential and solid balance sheet deserve a 10% premium.

Chevron investors receive a massive 4.2% dividend. The Jefferies price target for the stock is $116, and the Wall Street consensus price target is $110.75. Shares closed trading Friday at $102.16.

Concho Resources

Besides being one of the top energy plays in the Permian Basin, this is also a Wall Street favorite. Concho Resources Inc. (NYSE: CXO) is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties.

Earlier this year the company recently announced three separate transactions that enhance its position in the southern Delaware Basin, high grade the company’s portfolio and reduce net debt:

  1. It agreed to acquire approximately 12,000 net acres complementary to its core North Harpoon prospect in Ward and Reeves Counties, Texas, from a private operator for total consideration of approximately $360 million, through a combination of common stock, cash and drilling carry.
  2. Concho Resources completed an acreage exchange with Clayton Williams Energy, consolidating 21,000 net non-operated acres into a concentrated, operated position adjacent to the Concho’s Big Chief prospect in Reeves County.
  3. The company also agreed to sell 14,000 net acres in Loving County, Texas, for cash proceeds of $290 million.

The aggregate impact of these transactions is neutral to Concho’s 2016 capital and production outlook.

The company posted solid quarterly results that beat estimates as production came in above the high end of guidance and costs surprised to the downside. The Southern Delaware basin showed good performance during the quarter.

Deutsche Bank raised its price target to $150 from $140. The consensus target is set at $139.03. Shares closed on Friday at $133.73.