The rise in crude oil prices over the past year has breathed some new life into U.S. energy producers. With crude prices remaining near or above $60 a barrel, the sector is recovering from a more than a year of low prices and falling stock prices.
Analysts at Merrill Lynch have reviewed their energy portfolio and made some changes in price objectives and two ratings changes. The analysts also highlighted their top five picks following fiscal year 2017 earnings.
Oasis Petroleum Inc. (NYSE: OAS) was downgraded from Neutral to Underperform on higher operational risk in the Delaware basin of the Permian. The company continues to be one of the standout operators in the Bakken, and while Merrill Lynch thinks the firm is “strategically sound, its expensive recent Permian acquisition may expose [Oasis] to incremental op risks in a red-hot basin with a sub-optimal scale (22k net acres).” The stock’s price objective was cut from $11 to $9.
The analysts upgraded Whiting Petroleum Corp. (NYSE: WLL) from Underperform to Neutral on what they see as early signs of a turnaround. Whiting has a new CEO who is laying out a clear strategic plan for balanced growth and cash flow neutrality. Merrill Lynch also noted: “Following solid 4Q17 results, we also like the incremental emphasis to monetize Redtail assets.” The stock’s price objective was lifted from $32 to $34.
The analysts’ five favorites are listed here with comments and price objectives.
WPX Energy Inc. (NYSE: WPX): price objective raised from $19 to $20.
WPX remains a top pick as it continues to fire on all cylinders with solid operational momentum (recent Williston well results and success in Delaware longer laterals). The de-leveraging progress is running ahead of schedule and 4Q earnings call highlighted a very under-appreciated midstream valuation story.
Parsley Energy Inc. (NYSE: PE): price objective raised from $37 to $38.
Despite attractive relative valuation and a favorable risk/reward setup the primary overhang on the PE story since mid-2017 was relatively elevated Street expectations (oil cut and 1H18 output growth). We believe 4Q17 call has further helped reset consensus expectations. We also like new CEO’s simplified operational approach.
RSP Permian Inc. (NYSE: RSPP): price objective raised from $50 to $55.
Following op hiccups in 2017, RSPP is off to a solid start this year. On its 4Q earnings call, RSPP outlined a solid growth profile (>30%/ year in 2019 and 2020; 35% in 2018) that delivers free cash flow at $50/b oil. We believe this validates RSPP’s low cost structure, peer-leading capital efficiency metrics and superior cash margins.
PDC Energy Inc. (NASDAQ: PDCE): price objective raised from $62 to $68.
While 2017 was a challenging year for PDCE, exacerbated by regulatory overhang surrounding Colorado and higher line pressure issues, we see emerging momentum in Delaware. Overall results should be more visible as the year unfolds aided by start of Plant 10 in Wattenberg likely in 3Q18.
Diamondback Energy Inc. (NASDAQ: FANG): price objective raised from $145 to $153.
With a strong B/S, top tier growth profile, superior cash margins, steady execution and renewed focus on shareholder returns, we believe FANG is a good way to play offense and defense in the current macro environment. Recent dividend announcement reflects growing confidence in business outlook.
Merrill Lynch also offered a comment on Devon Energy Inc. (NYSE: DVN) on which it reiterated a Buy rating with a price objective of $53 (unchanged):
Johnston Barnett sale looks attractive and suggests remaining production is worth approximately $1.85bn. We see the speed of the $1bn buyback program as a potential surprise after 4Q17 commentary to strengthen balance sheet first. Tender could reduce annual interest expense up to as much as $79mm if successful.
Other price objective changes include SM Energy Co. (NYSE: SM) lowered from $31 to $25; Enterprise Group Holdings L.P. (NYSE: EPE) lowered from $3 to $2; Laredo Petroleum Inc. (NYSE: LPI) lowered from $13 to $11; and Jagged Peak Energy Inc. (NYSE: JAG) lowered from $18 to $16.
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