5 Oil and Gas Stocks Analysts Want You to Buy

March 22, 2015 by Jon C. Ogg

Crude oil may have recovered from lows earlier in the week, but at $46.50 or so a barrel the oil market remains very challenged. Old timers in this sector probably would confirm that it is now back to the time when you have to be smart and patient to make a good living. So, what is the outlook for the oil and gas stocks?

Wall Street analysts issue research reports routinely for the oil and gas sector, and just about every other sector out there. 24/7 Wall St. reviews dozens of these analyst reports each morning of the week to find new investment and trading ideas for its readers. With oil and gas stocks having been so battered, the focus right now is on which of those stocks analysts are telling their customers to buy now.

Keep in mind that not all analyst calls work out. In fact, some analyst calls turn out to be absolutely wrong. That being said, investors have to get ideas from somewhere, rather than randomly picking stocks out of a top hat.

Analysts and investors have been very timid in drawing a line in the sand here. After all, the drop in oil has felt like trying to catch falling daggers for those who made too large of bets.

This past week was a very mixed week for the markets, but Fed Chair Janet Yellen’s telegraph that interest rates would not be hiked sharply nor immediately gave a firm ground for investors to stand on. Some analysts even made some rather bold calls in the oil patch, from oil majors to master limited partnerships (MLPs), to exploration and production outfits, and so on.

ALSO READ: Are Exxon Mobil Shares Bottoming Out?

24/7 Wall St. would point out that some of these upside analyst target prices might seem too good to be true. After all, low oil is expected to stay for a while. Yet, here are five oil and gas stocks with very positive analyst research reports made in the last week.

Abraxas Petroleum

Abraxas Petroleum Corp. (NASDAQ: AXAS) saw two analyst calls made in recent days, one of which was very positive and one that was more muted. An SEC filing showed that a Rights Agreement has expired, and those rights are no longer outstanding and are not exercisable. The company operates oil and gas assets in the Rocky Mountains, Permian Basin and the Gulf Coast.

GMP Securities initiated coverage of Abraxas with a Buy rating and a $4.50 price target on Friday. The more muted call was from Imperial Capital. The firm maintained its Hold rating and its $3 price target. A week earlier, SunTrust raised its target on this $300 million outfit to $5.

Abraxas closed down over 6% at $2.91 on Friday. The consensus analyst price target is $4.19, and shares have traded in a range of $2.33 to $6.45 in the past 52 weeks.

Anadarko Petroleum

Anadarko Petroleum Corp. (NYSE: APC) was maintained as Buy at the independent research firm Argus last week. It may sound bad that the price target was cut to $100 from $120. Still, the stock closed out the week at $81.95, versus $78.42 the prior week. This $41 billion outfit has a consensus price target of $96.59 and a 52-week range of $71.00 to $113.51.

The question here is what Argus is looking at in a positive light. The firm’s Buy rating was said to reflect Anadarko’s industry-leading exploration program, and the firm expects 5% to 7% annual production growth through 2020. It further said that Anadarko’s solid balance sheet and access to liquidity will be a positive differentiating factor during the current industry downturn. Lastly, Argus pointed out the company’s substantial base of reserve assets that the management team should be able to develop or monetize.

ALSO READ: Merrill Lynch Initiates High-Yield Oil Service Specialty MLPs at Buy

Argus further said:

Our financial strength rating on Anadarko is Medium, the midpoint on our five-point scale. Despite current challenging market conditions, Anadarko has a very strong balance sheet. As of December 31, the company had $7.4 billion in cash and cash equivalents, up from $3.7 billion a year earlier. When Anadarko announced its 2015 capital program and 2015 guidance on March 3, it said that it had ‘pro forma’ cash of approximately $3 billion after the Tronox settlement of $5.2 billion and the $700 million in announced asset divestitures. In addition, the company has $7 billion in borrowing capacity from its credit facilities.

Emerge Energy Services

Emerge Energy Services L.P. (NYSE: EMES) had a monstrous gain this week for an oil-related entity. The MLP can thank Merrill Lynch for bringing this one to light. Merrill Lynch has a price objective of $67, much higher than the $42.61 price prior to our coverage of the units this week — and still much higher than the $49.55 closing price of Friday. The $1.2 billion outfit has one of those incredibly high distributions as well, above 10%, if it is maintained at the same rate ahead.

Emerge Energy is a limited partnership that is focused on mining, producing and distributing silica sand as a key input for the hydraulic fracturing of oil and natural gas wells. It also processes transmix, distributes refined motor fuels, operates bulk motor fuel storage terminals and provides complementary fuel services. The company operates its sand segment through its subsidiary Superior Silica Sands and its fuel segment through its subsidiaries Direct Fuels and Allied Energy.

The Merrill Lynch price objective of $67 still leaves an implied upside of 35%, even after the big rally and without considering what the future distributions might be. The consensus analyst price target is actually higher than the Merrill Lynch target at $69.50, and the stock’s 52-week range is $39.90 to $145.72. Needless to say, this is more volatile than many traditional oil and gas related MLPs.

ALSO READ: Despite Oil Woes, Pipeline and Infrastructure Deals Still Happening

Whiting Petroleum

Whiting Petroleum Corp. (NYSE: WLL) was featured in a Stifel grouping this week as one of five oil and gas stocks it thinks may have bottomed. Whiting is North Dakota’s largest independent oil producer, and it has recently put Texas acreage and pipeline assets up for sale. That new strategy may be an effort to appease some investors outraged by the possibility of any outright sale. Wall Street analysts feel as though Whiting could dispose of non-core assets and generate cash. As a reminder, Whiting is saddled by more than $3 billion in debt after December’s buyout of smaller rival Kodiak Oil & Gas.

Also, Sterne Agee made a call on Friday. The firm has a Buy rating, but said specifically not to chase any deal news. Its report said:

A series of opaque merger-related articles on Whiting in recent weeks, followed by a dubious peer upgrade, put a bid in WLL shares in early March, leading shares to outperform other oily E&Ps MTD. While the company’s decision to attend or pass on industry conferences creates good fodder for the rumor mill, we do not take it as definitive news a Whiting sale is imminent. We maintain our Buy rating but believe investors should downshift expectations to expect gas processing asset sales in the near term, not a full company sale, at a time when WTI crude is at a 6+ year low.

Stifel’s price target is $45, less than the consensus target of almost $46, but Sterne Agee actually has a $52 price target. Whiting’s shares were at $40.95 prior to Stifel’s mid-week research call, but Friday’s 2.6% drop took shares back down to $39.03.

ALSO READ: More Serious Concerns Growing About Petrobras

YPF

YPF S.A. (NYSE: YPF) remains a controversial South American oil stock, which may still be a kicking toy for the Argentine government ahead. Don’t tell that to Bank of America Merrill Lynch. The firm upgraded YPF to a Buy rating this past week, all the way from an Underperform rating. The two-notch upgrade is impressive enough, but the price target was raised to $39 from $26 — a 50% higher target. YPF shares were trading closer to $28 earlier in the week, but they closed the week out at $29.55.

YPF sees more upside potential from full development of Argentina’s shale resources, but in the analyst’s opinion, this would require improvement in oil prices and a reduction in unit costs. What Merrill Lynch is seeing is that the potential changes in Argentina’s economic policy would help to lower the level of Argentine risk embedded in the equity. That would in turn lend a stronger argument to the share price rising ahead. After the call, Merrill Lynch said that YPF is now the firm’s top pick in Latin American oil and gas. If Merrill Lynch is accurate, there is still about 32% upside left in YPF shares.

The Merrill Lynch report further said:

Long-term growth potential remains high, given (1) potential for strong upside for oil and gas output from YPF’s conventional and tight gas projects following below trend investment activity over much of the past 15 years and (2) upside potential from full development of Argentina’s shale resources, although this would require improvement in oil prices and a reduction in unit costs, in our view. Solid upside potential relative to both discounted cash flow and relative multiples. … The stock is also trading at strong discounts to global peers on both P/E and EV/DACF bases. In our view this suggests solid upside if the stock were to re-rate as risk declines.

ALSO READ: Stifel Calls a Bottom in These 5 Oil Stocks

In an effort to keep these calls from not being forgotten about, for better or worse, we wanted to include past reference from analyst calls in the oil and gas sector as well. Last weekend’s report covered eight oil and gas stocks that analysts want you to buy. These were in shares of Antero Resources, Bonanza Creek Energy, Exxon Mobil, Magnum Hunter, Rice Energy, Statoil, Whiting and Blueknight Energy Partners.