The week of June 10 was a volatile week for stocks, but West Texas Intermediate crude closed up less than 1% higher than the prior Friday at $48.88. The price of crude has been challenging $50, and many investors and those in oil feel that perhaps the worst has been seen in the oil patch. There are of course no assurances of that, and the market is never short of surprises, even for the most sophisticated investors.
24/7 Wall St. reviews dozens of analyst research reports each day of the week. This ends up being 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 energy sector, with a focus on oil and gas.
Investors keep proving that they are willing to buy the big stock market sell-offs. Ditto for the energy sector. The strategy of “sell in May and go away” did not come on too strong in 2016. Now many bargain hunters are looking for value and long-term upside. They best remember that the S&P 500 Index was valued at 18 times 2016 expected earnings earlier this week.
24/7 Wall St. has identified several standout analyst upgrades and downgrades in the energy patch from the week ending June 10. Investors also better not ignore the fact that many oil and gas stocks have risen far from their lows. Some of these energy stocks have probably risen too much, or may at least need to take a breather. Gains of 50%, 75% or 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. Even if oil remains this close to $50, many of the energy companies will continue to operate in zombie mode. There are still likely to be bankruptcies and layoffs in the near term. There of course also will be opportunities.
Investors need to be aware that it could be some time before higher oil prices show up into earnings for the oil and gas sector. S&P has also warned that the energy sector’s earnings drop was over 100% and down into the losses for the first time since S&P began collecting data.
Unlike some technology or biotech calls, energy analysts often have muted price targets and often have outlooks of 12 months or even longer. These calls can of course come with downside, and they may look rather silly if oil plunges under $40 per barrel again.
This past week brought a strategist report from Goldman Sachs, saying that there will be many opportunities in energy stocks while simultaneously being difficult to capitalize off of due to volatility. That sounds like a “Speculative Buy, but Not for the Squeamish” call. These were the top positive and negative research calls in the oil and gas stocks that stood out for the week of June 10.
Chesapeake Energy Corp. (NYSE: CHK) was downgraded to Underperform from Sector Perform at RBC Capital Markets on June 9. This is the equivalent of a Sell rating and was contrasted in great detail versus peer calls, and Chesapeake was given a $5 price target, compared with a prior $4.97 closing price.
Chesapeake Energy has a consensus analyst price target of $4.56 and a 52-week trading range of $1.50 to $12.95. Late on June also came word that S&P cut the credit rating to SD from CCC due to an unsustainable capital structure and to it facing a potential sharp liquidity contraction next year. Chesapeake shares closed down 9.4% at $4.42 on Friday.
Marathon Oil Corp. (NYSE: MRO) was started as Buy with a $21 price target (versus a $13.96 prior close) at KLR Group. The June 7 call was looking for 50% upside based on a 2018 mid-cycle capital yield generating a 20% discount to peer valuations. The firm also expects production to be higher than the mid-point of Marathon’s own production guidance.
Marathon closed out the week with a drop of 5.9% to $13.42 on Friday. Marathon’s consensus analyst target is $15.63, and it has a 52-week range of $6.52 to $27.77. It also has a market cap of $11.4 billion, even after being down 50% from its 52-week high.