3 Permian Basin Stocks to Escape the Oil Carnage

By Lee Jackson Updated Jan 13, 1:45PM EST · Published Feb 2, 11:15AM EST

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3 Permian Basin Stocks to Escape the Oil Carnage — © Thinkstock

Despite the constant chatter that there is a huge oil glut and that it can only get worse, the reality, according to Merrill Lynch, is that global oil demand grew by 1.7 million barrels per day in 2015, and that was the second highest jump in over a decade. Two-thirds of that demand growth they think was in direct response to lower prices. They also estimate that global demand will grow 1.2 million barrels per day for the next five years.

With production plummeting and demand growing sooner or later, the script will flip, and prices will start north again. In a new research report, SunTrust Robinson Humphrey is very bullish on the top Permian Basin plays, and one of the companies in the area is the firm’s new top pick. Here, we also cover two other companies stocks rated Buy that are situated in the Permian of West Texas.

Diamondback Energy

This stock remains a favorite of the SunTrust analysts and is the new top pick at the firm. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, that is focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin. Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
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The SunTrust analysts have cited in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow but could put the company in play as a takeover target. The analysts note that Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.

The company also raised capital last month by pulling off an equity secondary offering that raised some significant capital. It sold a total of 4 million shares at $56.50, which should help it continue to fight through the continued price woes.

SunTrust price target on the stock is $95. The Thomson/First Call consensus price target is $80.81. The shares closed Monday at $72.60.
Concho Resources

This is another one of the top energy plays in the Permian Basin, and it was just upgraded to Buy at SunTrust. Concho Resources Inc. (NYSE: CXO) is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties.

The company recently announced three separate transactions that enhance its position in the southern Delaware Basin, high grade the company’s portfolio and reduce net debt:

Concho agreed to acquire approximately 12,000 net acres complementary to the its core North Harpoon prospect in Ward and Reeves Counties, Texas, from a private operator for total consideration of approximately $360 million, through a combination of common stock, cash and drilling carry.
It completed an acreage exchange with Clayton Williams Energy, consolidating 21,000 net non-operated acres into a concentrated, operated position adjacent to Concho’s Big Chief prospect in Reeves County.
The company also agreed to sell 14,000 net acres in Loving County, Texas, for cash proceeds of $290 million. The aggregate impact of these transactions is neutral to Concho’s 2016 capital and production outlook.

SunTrust has a $115 price target for the shares, and the consensus price target is at $114.48. The stock closed Monday at $92.01.

Cimarex Energy

This is a top play for investors looking to the Permian Basin and is the other top pick stock at SunTrust. Cimarex Energy Co. (NYSE: XEC) is an independent exploration and production company. Its primary activities are in the Mid-Continent and Permian Basin areas of the United States. The company is focused on increasing shareholder value through strategies linked to generating attractive economic returns on capital employed and profitable growth in per-share reserves, production and cash flow. It intends to profitably grow reserves and production through a balanced mix of exploration, exploitation and acquisitions.

Cimarex has a diversified base of high-quality production and attractive drilling opportunities. It should be noted that hedge funds have initiated sizable new positions in the company over the past year, and like its brethren in the Permian, many consider the company a very solid takeover target.

Investors are paid a small 0.75% dividend. The SunTrust price target dropped to $115 from $130. The consensus price target is listed as $112.52. The shares closed Monday at $87.23, down over 6% on the day.
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Despite another big price swing in oil Monday, the fact of the matter is, with demand increasing and production falling, things are likely to firm by the end of the first half of this year. The current pullback could be one last good opportunity to add top companies in the Permian with such solid economics.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.