Energy

Baird Very Positive on 5 Red-Hot Permian Basin Energy Stocks

Lee Jackson

Published: February 22, 2018 8:30 am

Last Updated: January 12, 2020 3:10 am

While the price of oil has taken a quick dive from the January highs when the market sputtered, it has since firmed, with West Texas Intermediate crude back over the psychologically important $60 a barrel level. This is a huge positive for domestic energy exploration and production companies, as many have worked their breakeven levels down much lower than in years past. It also bodes well for the rest of 2018 if those prices can hold.

A new research report from the analysts at Baird features a very in-depth look at well performance, and one of the areas that continues to deliver is the Delaware Basin. It is the second largest component basin in the Permian Basin, which is located in West Texas and New Mexico.

In the report, the Baird team focuses on five companies that it rates at Overweight, and all of them have outstanding well production coming out of the Delaware Basin. Some of the five also are seeing big improvement in production when compared with 2016 and 2017.

Cimarex Energy

This stock is a top play for investors looking to the Permian Basin. Cimarex Energy Co. (NYSE: XEC) is an independent exploration and production company. Its primary activities are in the Mid-Continent and Permian Basin areas of the United States.

The company is focused on increasing shareholder value through strategies linked to generating attractive economic returns on capital employed and profitable growth in per-share reserves, production and cash flow. It intends to profitably grow reserves and production through a balanced mix of exploration, exploitation and acquisitions.

Cimarex has a diversified base of high-quality production and attractive drilling opportunities. It should be noted that hedge funds have initiated sizable new positions in the company over the past year, and like its brethren in the Permian, many consider the company a very solid takeover target.

Investors in Cimarex are paid just a 0.34% dividend. The Baird price target for the stock is whopping $136. The Wall Street consensus target was last seen at $142.73. The stock closed Wednesday’s trading at $95.13 per share.

EOG Resources

This leading energy company shows up well on many Wall Street screens. EOG Resources Inc. (NYSE: EOG) is one of the largest independent exploration and production companies operating in the United States, Canada, Trinidad, the United Kingdom and China.

The company has a big well in Loving County in the Delaware Basin. Top analysts say the well ranks as one of the best they have ever seen in the basin, and it could easily impact other companies drilling in the region. EOG’s average dollar gross per well on a yearly basis is a stunning $4.3 million, which ranks third among all operators.

Shareholders in EOG are paid a small 0.62% dividend. Baird’s $145 price target compares with a $125.67 consensus price target, as well as the most recent closing share price of $105.81.

Parsley Energy

This is a smaller capitalization stock for aggressive investors to consider. 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.

Baird has a $33 price target for the shares, while the posted consensus price target is $37.84. The stock closed most recently at $23.10 a share.

RSP Permian

This company also remains a top pick across Wall Street. RSP Permian Inc. (NYSE: RSPP) is an independent oil and natural gas company focused on the acquisition, exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin of West Texas. The vast majority of the company’s acreage is located on large, contiguous acreage blocks in the core of the Midland Basin, a subbasin of the Permian.

The company caught a string of upgrades from top Wall Street companies last year, and many have pointed to the possibility that the company could be a potential takeover candidate. Historically a vertical producer, the company has been transitioning to horizontal drilling in the past few years.

Note that the $46 Baird price objective is less than the posted consensus price target of $51.48. And the shares closed Wednesday at $34.55 apiece.

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WPX Energy

This is another smaller capitalization company, and its stock has solid upside potential. WPX Energy Inc. (NYSE: WPX) is an independent oil and natural gas exploration and production company that engages in the exploitation and development of unconventional properties in the United States. Its principal areas of operation include the Permian Basin, the Williston Basin in North Dakota and the San Juan Basin in New Mexico and Colorado.

WPX is a premier Permian-levered operator with sector-leading debt-adjusted cash flow growth supported by strong execution in the core Delaware, all while trading at a Williston Basin valuations primarily due to its relatively high financial leverage.

WPX offers differentiated upside in a recovery case based on its asset quality/productivity and debt leverage. The company is the largest acreage holder of the publicly traded mid-caps and may have pound-for-pound the best position in the Delaware Basin.

Baird has set its price target for the shares at $21. The posted consensus price objective was last seen at $19.08, and the stock ended Wednesday’s trading at $13.54 per share.

These five top stocks to buy all make good sense for investors looking to add energy, especially companies with exposure in the Permian Basin. And the recent selling is offering some timely entry points for those investors with a longer term horizon.