2018 Outlook: Credit Suisse Sees Big Upside for 5 Top Picks in Exploration & Production
Credit Suisse has made some major changes to its oil and gas coverage universe. The firm initiated coverage on 38 exploration and production (E&P) companies, as well as the major oil producers. It turns out that the firm has issued more neutral and cautious calls combined than it has Outperform ratings.
What stands out here is that the upside is significantly higher than the traditional 8% offered up by most analysts in Dow or S&P 500 stocks. The firm even offered its blue sky scenario for higher energy prices and what it sees as downside under an environment with lower energy prices.
According to Credit Suisse, the relative value in select exploration and production companies is not just only seen in the Permian. With major oil producers looking expensive, the E&P valuations have contracted and now reflect roughly a 10% discount to the firm’s own mid-cycle oil price forecast of $57 per barrel in oil. The firm remains selective there but sees a relative value within the sector, and the analysts like companies that offer the best combination of capital-efficient growth, deep inventory resources and relative valuation.
Also noted in the Credit Suisse call was that investors now are focusing on cash flows and returns and they prefer the companies reinvesting in high-return projects rather than those that are shifting to an outsized cash return model. The firm also projects increased production ahead, with a gain of about 12% in capital spending in 2018.
In the broad sector call, Credit Suisse had 17 new Outperform ratings, followed by 19 Neutral ratings and four Underperform ratings. Here are the top five E&P picks issued by the firm.
Anadarko Petroleum Corp. (NYSE: APC) was started as Outperform and assigned a $61 price target. That is up 29% from the $47.32 share price used ahead of the call, and just a tad under the consensus analyst target price of $62.76. Anadarko shares were up 2% on the day at $49.21 on last look. The blue sky scenario for Anadarko is $81 and the grey sky scenario is $42. Anadarko’s longer-term oil production growth is shown to be near the peer average, but its material free cash flow generation should enable it to generate superior cash flow growth.
Cimarex Energy Co. (NYSE: XEC) was given a $140 price target with Credit Suisse’s new Outperform rating. That target is more than $5.50 higher than the $134.46 consensus target price. The blue sky scenario brought a $167 price, but the grey sky scenario would generate a $94 stock. Cimarex was shown to have demonstrated better well productivity and consistent execution through a streak of “beat and raise” quarters in 2017.
Continental Resources Inc. (NYSE: CLR) was started as Outperform and assigned a $57 target price. That’s an implied upside of 21%, if the firm is correct from its $47.08 basis. Continental Resources shares were up 1.2% at $48.65 on Tuesday, and the consensus analyst target is only $50.15. Credit Suisse has a blue sky scenario of roughly $70, but its grey sky scenario is down more than 25% at $36. On a “back to the Bakken” basis, Credit Suisse feels that the company navigated the downturn remarkably well, and the firm sees it generating 15% to 20% per year of oil-led production growth and meaningful free cash flow for years to come.
Extraction Oil & Gas Inc. (NYSE: XOG) was assigned a $19 price target along with the new Outperform rating. That represents about 28% upside from the basis price of $14.77, but its shares were last seen up at $15.52. Credit Suisse was under the $20.08 consensus price target. Its upside target under blue skies is $25 and the downside target under grey skies was $12. Since its IPO in late 2016, Credit Suisse sees the company as having demonstrated strong execution, improved completion design and solid drilling inventory through leasehold acquisition.
Marathon Oil Corp. (NYSE: MRO) was started as Outperform, and the firm’s $20 target price implied upside of about 35% from the firm’s $14.75 basis for the call. The stock was up just 0.4% at $15.21 on Tuesday, and the consensus analyst target is a less ambitious $17.88. Marathon was given a $23 blue sky scenario target but also a $12 downside target under its grey sky scenario. Marathon was said to have one of the most attractive major E&P growth profiles, while its own sharply improved portfolio is still not reflected in its valuation.