8 Big Oil and Gas Analyst Upgrades and Downgrades Too Big to Ignore

June 5, 2016 by Jon C. Ogg

oil tanker
Source: Thinkstock
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.

CorEnergy Infrastructure Trust Inc. (NYSE: CORR) was raised to Buy from Hold at Stifel on June 1. The firm also has a $32 price target, 33% higher than the prior $24.05 close. This trust has a current annualized dividend of $3 per share as well, so the upside may be even larger here. Just don’t forget about the bankruptcy of a the parent company of its largest tenant. CorEnergy Infrastructure Trust’s 52-week trading range of $10.90 to $35.00 should show just how volatile this one is.

NGL Energy Partners L.P. (NYSE: NGL) was raised to Buy from Hold at Stifel on June 3. It was assigned an $18 price target, compared with a prior $16.63 closing price. Investors will want to consider that NGL is still listed as having a distribution yield-equivalent of close to 10%, so the implied upside here might be much more than just the price appreciation. The consensus analyst target is much lower, down at $15.00, and the 52-week range is $5.57 to $33.64.

Weatherford International PLC (NYSE: WFT) saw two different calls this past week. Simmons raised its rating to Overweight and its price target to $8.00 from $7.20. Wells Fargo reiterated its Market Perform rating, but the firm increased its valuation range to $5.50 to $7.00 from the prior $5.00 to $6.50 after an exchangeable note offering improved its liquidity. Shares closed out the week at $6.12 after a 3.9% gain on Friday, and the 52-week range is $4.71 to $14.42. The consensus analyst price target is $7.93.

I'm interested in the Newsletter
 

Merrill Lynch’s Exxon Mobil downgrade was to Neutral from Buy. After an $89.24 close, the firm said that Exxon’s outperformance has lifted the shares within sight of the firm’s $96 price objective for a fair value. The thesis of improving E&P margins is said to be intact, but it perhaps has been discounted by Exxon’s role in reducing energy underweights. Exxon was also removed from a so-called Value 10 list of stocks at Merrill Lynch.

Great Plains Energy Inc. (NYSE: GXP) was downgraded to Underweight from Equal Weight with a $28 price target at Barclays on June 2. The prior close was $28.97, but the stock was down over 2% to as low as $28.33 on the day of the downgrade. The stock ended the week at $28.50, and it has a 52-week range of $24.06 to $32.74.

Patterson-UTI Energy Inc. (NASDAQ: PTEN) was downgraded to Underperform from Neutral at Credit Suisse on June 1. This came with a downside price target of $15, versus a prior closing price of $18.61. As a reminder, Underperform is this firm’s equivalent of a Sell rating. The shares were down at $18.22 on the day of this downgrade, and the following day the stock was under the $18 mark. It closed out the week at $18.27, after rising 1.7% on Friday. Its 52-week range is $10.94 to $21.55, and the consensus price target is now $19.39.