Oil had another good week, starting out just over $57 per barrel for West Texas Intermediate (WTI) crude and ending at about $59.25 per barrel. With the possibility that oil bottomed out in the mid-$40s, and with the possibility of $60 oil again, many investors have been bargain hunting in the battered oil and gas stocks. After all, that drop from over $100 to under $50 came on much harder and much faster than even the most pessimistic and nimble investors might have guessed.
24/7 Wall St. has covered some of the top analyst calls in the oil and gas sector in recent weeks. The effort is not to try to nail short-term gains, but to find those great undervalued long-term value situations that can help investors build wealth over years via capital gains and dividends (or distributions). As a reminder, investors have bought dips in their favorite stocks for nearly four years now, and that trend does not appear to be letting up at all.
This past week brought many great analyst calls. Some upside targets in the year ahead were even listed as being above 20% or 30%. As a reminder, the current goal of most equity managers is about 8%, and our own 2015 DJIA bull and bear evaluation modeled gains of 7.4% for the full year, and 2.7% of that would be from dividends.
The first weekend review in May brought positive analyst calls and upgrades in the following stocks: CONSOL Energy Inc. (NYSE: CNX), Enterprise Products Partners L.P. (NYSE: EPD), Marathon Oil Corp. (NYSE: MRO), Whiting Petroleum Corp. (NYSE: WLL) and YPF S.A. (NYSE: YPF).
There were two other positive energy sector calls this week — one from Cowen for buying three exploration and production companies (Anadarko, Pioneer, Range) and one from Credit Suisse that is positive on master limited partnerships (MLPs) (Energy Transfer, Kinder Morgan, Plains), but these calls were not included to avoid double coverage. On top of oil prices coming back from the grave, it even looks as though short sellers are unwinding massive bets against most of the oil giants.
CONSOL Energy: Gas Value Trumps Coal
CONSOL Energy is usually lumped in with coal, but it has not lost all of its value along with other coal stocks. That is because it is also a big natural gas producer. Its first-quarter earnings beat expectations, and shares were up about 10% at the end of the week from the start of the week. CONSOL was maintained as Buy at Sterne Agee CRT, but the price target was cut to $45 from $48. What investors need to know is that this is the firm with the highest target price, which means this is the most bullish of all analysts. This compares to a prior close of $28.91, but CONSOL closed out the week all the way up at $33.09. CONSOL has a consensus price target that is more conservative at $36.33.
Michael Dudas, the analyst at Sterne Agee, has his highest street price target based off of asset valuations being high versus the existing share price for the coal and gas businesses combined. Dudas said:
First quarter earnings beat expectations on better-than-expected cost performance across coal and gas operations. Management maintained annual gas production growth targets through 2016, and continues to expect thermal coal MLP in mid-2015 and met coal IPO in the fourth quarter of 2015. We have lowered to our price target to reflect higher coal and lower gas contribution to 2016 expected earnings mix. CONSOL remains on track to deliver asset value while continuing to selectively monetize non-core assets. Shares continue to exhibit attractive asset value relative to current valuation.
As natural gas prices improve, metallurgical coal market prices bottom and normalize, Consol’s Marcellus profile achieves targeted growth, and management continues to successfully monetize additional non-core assets, the valuation gap should narrow.