One of the very best ways to judge the health of a public company is by the way the bonds trade. The bond market, and bond investors, often can help predict the way that a company’s stock will trade. An outstanding new research report from SunTrust Robinson Humphrey tracks the performance, or in most cases outperformance, of the debt of some top exploration and production (E&P) companies.

The SunTrust team found six companies in which the debt is outperforming strongly both year to date and in the past 30 days. The research report notes that an analysis of past five full cycles showed that top 50% of E&P companies that performed best in equity up-cycles had bonds that had best returns in down cycles. The bottom line for investors? The bonds outperforming now could signal strong equity performance in the next up-cycle.

We picked four of the companies rated Buy that have had tremendous bond outperformance that also have almost 100% or more upside to the SunTrust current price targets. These are stocks that are suitable for very aggressive accounts that have a patient long-term outlook.

CONSOL Energy

The stock has been cut almost in half from highs printed last summer. CONSOL Energy Inc. (NYSE: CNX) is one of the largest independent natural gas exploration, development and production companies, with operations centered in the major shale formations of the Appalachian basin. It deploys an organic growth strategy focused on rapidly developing its resource base. As of December 31, 2014, CONSOL Energy had 6.8 trillion cubic feet of proved natural gas reserves. Its premium coal assets are sold to electricity generators and steelmakers, both domestically and internationally.

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Top Wall Street analysts point out that company management noted that operations in the Marcellus continue to become more efficient as CONSOL drills longer laterals, more stages and uses more proppant. The efficiency may be helping to drive earnings, which have seen a nice streak of beating estimates, over the past half year. The company’s debt has seen 45% outperformance year to date and 7% over the past 30 days.

CONSOL investors receive a 0.5% dividend. The SunTrust price target for the stock is $15. The Thomson/First Call consensus price target is higher at $16.38. Shares closed Monday at $7.88.
Gulfport Energy

This is the top pick at SunTrust and also offers tremendous upside potential. Gulfport Energy Corp. (NASDAQ: GPOR) is an independent oil and natural gas E&P company with its principal producing properties located in the Utica Shale of Eastern Ohio and along the Louisiana Gulf Coast. In addition, Gulfport holds a sizable acreage position in the Alberta Oil Sands in Canada through its 24.9% interest in Grizzly Oil Sands.

SunTrust notes that the bonds have seen a solid 41% outperformance year to date and 14% over the past 30 days. Gulfport is also a favorite of hedge fund managers. In fact, according to Insider Monkey, 36 hedge funds currently own positions in the stock.

The SunTrust price target is $60, and the consensus target is much lower at $44.36. The stock closed Monday at $25.42.

Southwestern Energy

This company surprised analysts earlier this year when it actually raised their capital expenditure budget for 2015. Southwestern Energy Co. (NYSE: SWN) explores, develops and produces natural gas and oil in the United States.

Southwestern has invested heavily in the Marcellus play, where it holds leases in approximately 337,300 net acres. Reports indicate that the company has increased its acreage in the Marcellus Shale in Pennsylvania by acquiring interest from other stakeholders. Southwestern’s gas production increased to 766 Bcf in 2014 from 656 Bcf in 2013. This will provide the company exposure to a play with a low cost structure and additional acreage.

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The company also is involved in the gathering, marketing, and transporting natural gas, and oil and natural gas liquids. As of December 31, 2014, Southwestern had pipelines of 2,017 miles in Arkansas, 105 miles in Pennsylvania, 25 miles in Texas, and 16 miles in Louisiana in its gathering systems.

The bonds have seen an incredible 50% outperformance year to date and 8% over the past 30 days.

The SunTrust price objective is $17, and the consensus target is higher at $19.30. The stock closed Monday at $9.01

Whiting Petroleum

This is North Dakota’s largest oil producer and another top stock to buy now. Whiting Petroleum Corp. (NYSE: WLL) is an independent oil and gas company that explores for, develops, acquires and produces crude oil, natural gas and natural gas liquids, primarily in the Rocky Mountain and Permian Basin regions of the United States. Its largest projects are in the Bakken and Three Forks plays in North Dakota, the Niobrara play in northeast Colorado and its Enhanced Oil Recovery field in Texas.

By year’s end, the company expects to continue to sell non-core assets. The assets it already has sold this year total $300 million and were much less productive than its Williston Basin assets. Whiting has stated that by increasing sand volumes in wells located in North Dakota, it has increased well productivity over other wells drilled in the same area by as much as 40% to 50%. The company bonds have seen 49% outperformance year to date and 8% over the past 30 days.

The SunTrust price target is $35, and the consensus target is $27.78. The stock closed Monday at $16.51.

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The advantage for equity investors is that bond traders and investors generally are tracking who will stay solvent and continue to pay the coupons on current bonds. The outperformance of the debt now could bode well for the equity in 2016 and beyond.

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