5 Oil and Gas Stocks Analysts Want You to Buy

May 2, 2015 by Jon C. Ogg

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.

ALSO READ: Analyst Gets More Positive on Top Eagle Ford Shale Oil Stocks

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.

ALSO READ: Why Key Analyst Thinks This High-Yield MLP Has 50% Upside

Enterprise Products Partners: Captain Kirk Beams Up MLPs Again

Enterprise Products Partners reported results this past week that felt like a mixed report card, but the top MLP closed up on the week with a price of $34.22 on Friday (and with a yield-equivalent of about 4.5%). It was reiterated as Outperform with a $41 price target at Credit Suisse on Friday. The Credit Suisse report said:

Enterprise’s solid performance this quarter was an apt demonstration of how EPD can use its interconnected asset footprint to prosper despite very difficult market conditions. The solid performance prompts us to raise our EBITDA and DCF estimates in 2015 and 2016 by 2% and 1%, respectively, though we could easily justify a bigger increase if we extended margins from this quarter out in the future. We continue to forecast 1.4 to 1.5 times distribution coverage over the next four years, easily supporting our approximate 5% to 7% distribution growth trajectory.

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Merrill Lynch was much more positive in its reiterated Buy rating. The firm has a $43 price objective and said:

Enterprise noted that it currently has over $6 billion worth of projects currently under construction and this morning, announced a new joint venture with Occidental Petroleum. … We believe the majority of Enterprise’s growth backlog is committed and do not see risk of a reduction in the $6 billion in projects underway, even in a lower commodity environment. … We continue to believe EPD’s distribution growth trajectory will remain unchanged, bolstered by a robust growth backlog and comfortable distribution coverage.

Marathon Oil: Turnaround Crosses the Rubicon?

Marathon Oil was reiterated as Outperform at Credit Suisse this past Monday, and the price target was raised to $36 from $32 in the call. Shares were at $30.33 at the time of the call, and the firm warned that this coming week’s earnings likely will be tough but gave potentially significant long-term share price upside to its above-consensus targets. Credit Suisse has Marathon as a Focus List stock, and the report said:

In recent weeks, it seems Marathon is finally getting some credit for the deep inventory of high return shale locations that they outlined in September last year. That update was overshadowed by a few small gyrations in the oil market. In our prior reports, we’ve highlighted the value in Marathon’s Oklahoma resource. However, recent wells have driven even more interest in this emerging play. … Downspacing and/or productivity improvements could add up to a further $12/sh. First quarter results (due May 6) will be tough; we forecast a $0.53 EPS LOSS and a large outspend. However, as oil markets rebalance, Marathon has the shale inventory to succeed.

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Another new call late in the prior week came from Nomura Securities. The firm started Marathon with a Buy rating and gave a price target of $36.00, based on it being past the halfway point of its restructuring effort. Marathon closed out the week at $30.77, with close to a 3% dividend yield. It has a 52-week range of $24.28 to $41.92 and a consensus price target of $32.64.

Whiting Petroleum: Rockin’ the Bakken Again?

Posting a smaller than expected loss may not be enough to rekindle buyout hopes for this Bakken oil player, even if Whiting saw numerous positive calls. Whiting shares closed at $37.68 on Friday, and its 52-week range is $24.13 to $92.92. Whiting was raised to Buy from Neutral, and the price target was raised to $44 from $34 (versus the prior $35.13 close) at SunTrust Robinson Humphrey early last week.

Then Whiting was reiterated as Buy with a $52 price target by Sterne Agee CRT’s Tim Rezvan toward the end of the week. His report said:

Despite weaker-than-expected natural gas/NGL realizations, core results from Whiting’s oily portfolio were strong. Production beat expectations, lease operation expense was at its lowest level since ’05 and updated 2015 guidance suggests realizations should tighten and cash costs should decrease.

Oppenheimer maintained an Outperform rating and raised its target to $47 from $40. The Oppenheimer report said:

With Whiting now likely to run cash-flow neutral next year while generating $500 million to $1 billion from asset sales, we see the EV/EBITDA discount to the E&P group narrowing to 20%, and increase our price target to $47 from $40 (using a 27% discount). Whiting also reported impressive results from slickwater fracs and recently acquired Kodiak acreage.

ALSO READ: 5 Potential MLP Buyout Candidates

Merrill Lynch reiterated its Buy rating with a $45 price objective. The firm said:

Production of 166.9Mboe/d came in above the high end of guidance, reflecting Whiting’s continued success with new completions in the Bakken. … In our view, Whiting remains one of the cheapest ways to play a continued recovery in the oil price.

YPF: Don’t Cry for Me Argentina

YPF S.A. (NYSE: YPF) was given one of the larger upgrades, on a basis of price target to the current share price, but this is the Argentine play, so on the surface it would seem to have the most risk as well. JPMorgan raised the rating to Overweight and gave a $440 price target at the time. YPF’s American depositary shares closed out the week in New York trading at $30.95 per share, against a 52-week range of $20.83 to $41.74. That 52-week range and current share price should give you an idea of the volatility it can see.

The JPMorgan report said that YPF is likely to continue benefiting from a supportive fuel pricing policy near-term, which would allow for higher price realization that would allow it to cope with $6 billion in capital expenditures. JPMorgan’s valuation is concentrated on conventional resources and downstream, with the unconventional oil and gas projects still being in the early stages and adding only a small amount to a sum of the parts valuation.

JPMorgan’s team also believes that country-risk tailwinds are likely to help shares going into the reelection of President Cristina Fernandez de Kirchner this coming October. While JPMorgan also talked about this trading at a discount to global peers, 24/7 Wall St. would remind readers why: this is a troubled Latin American nation that has a history of trying to take away what it wants with foreign investors holding an empty bag.

24/7 Wall St. would also point to a past research note from Merrill Lynch back in March. The firm raised YPF to Buy with a $39 price target, based largely on expected country risk improvement at the time. A much more recent report from Merrill Lynch, from April 29, said:

There is great expectation for changes in Argentina that could come under a new government after the fourth quarter of 2015 election. While the end result of potential changes should be, on balance, favorable for the energy sector, key challenges remain. Despite challenges, we remain positive on the Argentine oil and gas sector, with Buy ratings on both YPF and Petrobras Argentina.

ALSO READ: Is Kinder Morgan Now the Perfect Energy Stock?

Again, the aim here is not to see which oil and gas stocks are going to pop on news coverage or on any one-quarter earnings expectations. It is for investors who are taking long-term views, looking for companies that offer value or that may have been oversold during the crushing oil price carnage that took place in late 2014 and early 2015. Not all these companies have the same risk parameters. That being said, investors should do their own due diligence, and the caveat that you must understand what it is that you really own must be kept in mind.