While the stock market was punished on Friday and could be in for more selling this week, oil held its ground for the most part, with West Texas Intermediate crude still trading above the $65 a barrel level. For worried investors, it may make sense to jettison stocks that have big gains and start to look at a sector like energy, which probably still has solid potential for the rest of 2018.
In a new and very extensive research report, Deutsche Bank initiates coverage of U.S. exploration and production stocks. Of the 17 companies the firm started coverage on, 11 are rated Buy and six are rated Hold, and many are in the Permian Basin. While the analysts are positive on the sector, they temper that by remaining cautious on the overall macro outlook, as oil has put in a stellar run. The report noted this:
We note that despite being in one of the most valuable parts of U.S. shale, these stocks are trading at a discount to long-term average levels. In part this reflects the recent investor debate on whether shale can create value and return cash flow to shareholders. Based on our estimates and our analysis that supports our macro outlook, we believe our coverage offers >25% return and should generate free cash flow in 2019 and beyond at our long-term WTI price of $57 a barrel.
We screened the 11 stocks rated Buy for the firm’s three top picks and also found two additional companies that have outstanding potential.
This top Permian Basin play for more aggressive accounts is also a top pick at Deutsche Bank. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin.
Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow, but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.
The Deutsche Bank price target on the stock is $162, and the Wall Street consensus target is $145.55. The shares closed Friday at $122.46, down 4.18% on the day.
This is a smaller capitalization stock for aggressive investors to consider, as well as another of the top picks at Deutsche Bank. Parsley Energy Inc. (NYSE: PE) is an oil and gas producer with 227,000 net acres in the Permian Basin. The majority of acreage sits on the Midland side of the basin, but the company also holds a small acreage position in the Delaware Basin.
The company had 222 million barrels of oil equivalent of proved reserves at the end of 2016, of which 61% was oil. Through strategic acquisitions and acreage swaps, it has grown its acreage position since its initial public offering and has over 7,900 horizontal locations across multiple prospective zones.
Parsley is a catalyst rich and a Permian Basin pure play. The company has some of the strongest wells in the basin, generating returns that are among the best in the industry. Parsley is also rapidly de-risking its drilling inventory and is well-positioned to continue to beat its strong growth projections.
The $38 Deutsche Bank price target is in line with the consensus price target of $38.70. The stock closed trading Friday down 2.65% to $23.13.