The end of 2017 and the start of 2018 are heralding several critical issues for investors. The bull market is now nearly nine years old, and at the same time oil has come back to challenge the $60 per barrel mark. Energy has lagged as an investment for quite some now, but a recent resurgence of interest from investors has been rather powerful and sets the stage for energy to be relevant again. Now the question is how to position portfolios for 2018 and beyond.
24/7 Wall St. reviews dozens of daily analyst research reports, and this turns into hundreds of reports each week. In the second half of December there have been many Wall Street strategists making big bold projections for stocks in the year ahead. That is after the Dow Jones Industrial Average is up about 25% and the S&P 500 is up about 20% so far in 2017. What has been hard to ignore is that Wall Street is now calling for energy stocks to return to being a positive factor ahead rather than a drag as was seen throughout much of 2017.
We have tracked several macro-calls around oil in the past couple of weeks of 2017, and we have specifically tracked what are now 13 analyst calls on individual energy stocks.
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. Still, the firm sees major oil producers looking expensive and E&P valuations having contracted. They reflect a 10% discount to the firm’s own mid-cycle oil price forecast of $57 per barrel in oil.
Jefferies recently set new oil price targets. It is now calling for Brent to average $63 per barrel and West Texas Intermediate (WTI) crude to average $58.75 per barrel in 2018. Those figures are now also set at $60 for Brent and $58 for WTI in 2019, and Henry Hub natural gas prices of $3.25 per million British Thermal Units in 2018 and beyond. The longer-term forecast for oil remains $65.
A new RBC research report raised the firm’s oil price estimates across the board for the next two years. WTI is seen averaging $54 a barrel in 2018 and $56 in 2019, but oil is now above that. RBC’s longer-term price estimate for oil is set at $65.
Also, Kayne Anderson has just announced that the Tax Cut and Jobs Act had a positive impact on its KYN MLP closed-end fund. The firm said the net asset value per share was $18.57, up $1.84 (some 11.0%) as a result of the tax reform enactment. Prior to the bill becoming law, the deferred tax liability was based on the federal tax rate of 35% and the cut to 21% significantly reduces its deferred tax liability and resulting in the increase to net asset value.
As a reminder, most analyst calls in general tend to call for upside of roughly 8% in large cap stocks at this stage of the bull market. Amazingly, some stocks with Buy and Outperform ratings are coming with just 5% upside to their price targets. Some of these calls imply that investors may expect total returns handily higher than that 8% mark.
Consensus analyst data are from Thomson Reuters, and details have been offered on each call. There have been more than just 13 energy stock calls from analysts, but these were the ones that stood out the most for larger upside calls in 2018.
Anadarko Petroleum Corp. (NYSE: APC) was started as Outperform and assigned a $61 price target by Credit Suisse in mid-December. That target was up 29% from the $47.32 share price ahead of the call, but Anadarko shares were last seen back up at $54.00. The consensus analyst target price is currently closer to $62.50, and Credit Suisse’s so-called blue sky scenario for Anadarko is all the way up at $81. The shares have a 52-week trading range of $39.96 to $72.32, making the targets seem less than overly bullish.
According to Credit Suisse, Anadarko’s longer-term oil production growth is near the peer average. Still, its material free cash flow generation should enable it to generate superior cash flow growth.
Anadarko shares were last seen down 22% so far in 2017.
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