If Trump’s Border Adjustment Tax Includes Oil, These 5 Stocks Could Fly

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You have heard the old saying “Don’t get mad, get even.” That is just what is behind President Trump’s threat of a border adjustment tax. Many of our companies are penalized overseas with taxes and tariffs. In addition, some companies have moved jobs out of the United States but sell those products back into the country. While it is unlikely to be an across-the-board tax, some of the implications are huge.

A new report from the energy team at Baird makes the case that while it is possible the tax could be applied to imported oil, it is not probable. Given the president’s penchant for unilateral actions though, it has to remain as a tail risk possibility. The Baird team noted this in the report:

The primary counter argument against including oil in a BAT, if it happens at all, would be the rise of retail fuel prices. US consumers can stomach higher prices at the pump in a slowly rising environment, particularly as fuel sales tend to correlate to employment and economic activity rather than to price. But higher energy prices are much like a regressive tax and would particularly impact the blue-collar voting block that helped propel Trump into office.

However, if the tax was put into place, Baird thinks it would be a windfall for domestic oil producers. The analysts think that the “oily” domestic independents would see a big benefit, and they cite five companies with stock rated Buy that fit the bill.

SM Energy

This smaller independent energy company could really feel the effect of a spike in oil pricing. SM Energy Corp. (NYSE: SM) engages in the acquisition, exploration, development and production of crude oil and condensate, natural gas, and natural gas liquids (NGLs) in onshore North America. It primarily has operations in the South Texas and Gulf Coast region, which focuses primarily on Eagle Ford shale program; Rocky Mountain region, comprising the Bakken and Three Forks formations in the North Dakota; and Permian region, covering western Texas and southeastern New Mexico.

While fourth-quarter production was below some estimates, the company has eight Howard County wells averaging initial production rates of 1,400 barrels of oil equivalent per day and 90% oil, both better than expectations. Top analysts continue to view SM as a transition story with the Permian assets set to drive growth and margin expansion.

The Baird price target is for the stock is $50, and the Wall Street consensus target is $43.59. The shares closed most recently at $30.35.

Laredo Petroleum

This is a smaller cap story for investors looking for Permian exposure. Laredo Petroleum Inc. (NYSE: LPI) operates as an independent energy company in the United States. It focuses on the acquisition, exploration and development of oil and natural gas properties, as well as the transportation of oil and natural gas, primarily in the Permian Basin in West Texas. As of December 31, 2015, it had interests in the 135,408 net acres in the Permian Basin and had total proved reserves of 125,698 thousand barrels of oil equivalent.

The company took advantage of its strong balance sheet and stock price to lock up some additional acreage within its current footprint in the Midland Basin. The company spent $125 million to add 9,200 net acres, which works out to roughly $13,500 per acre. That price was very reasonable compared to what rivals paid for acreage in the region in previous years.

Baird has a $17 price target, and the consensus target is $15.44. The shares closed Thursday at $13.96.