West Texas Intermediate crude closed out the week at $48.62, down 33 cents on Friday. The price of crude bumped up against $50 on two occasions on Tuesday, May 31, but that seems to be the current resistance level on the chart — only to be reminded that oil was under $30 earlier this year. Most investors feel that the bulk of the oil price shakeout has been seen, so they are looking for which oil and gas stocks they should be buying, as well as which ones they should be selling or avoiding.
24/7 Wall St. reviews dozens of analyst research reports each day of the week, and this becomes hundreds of analyst calls each week. It turns out that there are almost always some big buy and big sell recommendations each week in the oil patch.
Investors keep proving that they are willing to buy the big stock market sell-offs. This holds true for the oil sector too. The strategy of “sell in May and go away” did not come on too strong in 2016, leaving many bargain hunters seeking value and long-term upside.
24/7 Wall St. has identified several standout analyst calls in the energy patch from the week ending June 3. Investors need to consider first and foremost that many oil and gas stocks have risen massively from their lows. Some of these energy stocks have probably risen too much. Gains of 50%, 75%, 100% or even exponential gains just are not normal.
Another consideration is that many energy analysts did not adequately brace for the downside that was seen in 2015 and the start of 2016. It was also a fact that many of those same analysts were very late to change their negative bias in the latest run-up.
24/7 Wall St. saw four analyst upgrades and positive research calls in the energy patch that stood out above the rest. We also saw three notable big downgrades.
Again, oil has come a long way down before this rise from the sub-$30 graveyard. Even if oil remains this close to $50, many of the energy companies will continue to operate in zombie mode. Some companies will continue to enter bankruptcy and, sadly, there will continue to be more layoffs.
Investors should understand that it could be quite a while before we see the higher oil prices reflected into broad industry earnings for the oil and gas sector. S&P sent out a note on Friday saying that the energy sector will post a drop of 106.6% in earnings to quarterly net losses — for the first time since S&P began collecting data.
Another warning here is that energy analysts are almost always making long-term calls rather than short-term ones. These could all see a lot of downside before analysts change their tune. Lastly, if OPEC delivers bad news or if global demand trends start to take oil back toward $40 or lower, these calls will look way too optimistic (if not silly).
Here are the week of June 3 positive and negative research calls that stood out in the energy patch.
Energy giants Occidental Petroleum Corp. (NYSE: OXY) and ConocoPhillips (NYSE: COP) were touted heavily by Merrill Lynch this week over the likes of Exxon Mobil Corp. (NYSE: XOM). The call here was that Exxon had risen too close to the Merrill Lynch price objective. The firm went into broad detail about why Occidental and Conoco offer better absolute value. It also sees stronger yield appeal in that value.
Occidental saw its price objective raised to $87 from $85 and the stock closed out the week at $74.83 with close to a 4% yield. Merrill Lynch’s target is almost $10 higher than the consensus estimate of $77.92 and just shy of the $91.00 street-high analyst target.
Conoco has a $71 price objective at Merrill Lynch, which is sharply higher than the current $44.18 share price. Note that this 60% upside (or about 65% if you count the 4.5% yield) is the highest price target on Wall Street.