Energy

Stifel Stays Positive on Energy Stocks Into Earnings: 5 Top Buys

Lee Jackson

Published: July 23, 2018 8:05 am

Last Updated: January 11, 2020 8:37 pm

Just when it seemed that oil was ready to head to $80 a barrel, the combination of increased OPEC and Russian production, along with the Saudis putting the production pedal down, has helped to push prices on West Texas Intermediate below $70, and Brent back down near $74. Toss in some jawboning from the U.S. president and some big storage numbers, and that also helped with the slide in pricing.

The bottom line for investors is that even after the declines, prices are still much higher than last year. Like many on Wall Street, the analysts at Stifel are positive on the sector, not only into the second-quarter results but also going forward. They said this in a recent research report:

Over the last two months, we have held meetings and conference calls with ~100 investors across the U.S. The investor base was composed of dedicated mutual funds (~40%), generalist (~35%) and dedicated hedge funds (~25%). Investor sentiment was decidedly positive on crude prices and broadly constructive on energy stocks, with timing being the only distinguishing factor between the two. In general, most investors prefer stocks with Brent exposure through 2019 and the Permian stocks for long-term energy exposure. Our top picks are biased towards the Anadarko, Permian, and Williston, and more specifically, stocks with improving yields (large-caps) and DAPPS (smid-caps) profiles.

The analysts feel that the price could have some firm footing in the $60 to $70 range, a level where most companies are solidly profitable. The firm has numerous top picks, but we stuck with some of the larger capitalization players that are preferred stocks on the basis of the analysts seven variable quantitative analysis. All are rated Buy at Stifel.

Cimarex Energy

This 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 receive just a 0.3% dividend. The Stifel price target for the stock is $178, and the Wall Street consensus target is $125.87. The shares closed Friday at $96.75.

Concho Resources

This company recently bought RSP Permian for $9.5 billion, and most on Wall Street like the deal. Concho Resources Inc. (NYSE: CXO) is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties.

It offers investors a unique combination of investment themes, including valuation, rate-of-change and resource expansion themes. The company is the largest acreage holder of the publicly traded Permian large-caps and provides investors peer-leading exposure to three of the most impactful catalysts across the Delaware Basin, including the Wolfcamp XY, Wolfcamp D and Bone Spring Shale.

The Stifel price target was boosted from $190 to $210. The consensus target is $181.29. The shares closed Friday at $144.29.

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Diamondback Energy

This is a top Permian Basin play for more aggressive accounts. 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.

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.

Stifel has a $166 price target, and the consensus target is $163.16. The shares closed Friday at $131.15.

Newfield Exploration

This company has one of the best production mixes of the stocks rated Buy, with oil, natural gas and the balance in natural gas liquids (NGLs). Newfield Exploration Co. (NYSE: NFX) is an independent energy company engaged in exploration, development and production of crude oil, natural gas and NGLs.

The company is focused on North American resource plays, and the company’s principal areas of operation include the Mid-Continent, the Rocky Mountains and onshore Texas. In addition, Newfield has oil developments offshore China.

As investors look for non-Permian exposure, the company maintains sufficient STACK inventory that makes a spacing concern driven sell-off puzzling. The company is in show-me mode and should continue to rerate with execution.

The $43 Stifel price target compares with the $37.79 consensus target. The shares ended last week at $28.65.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play. Pioneer Natural Resources Co. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.

Pioneer is a huge player in the Permian Basin and the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain a top player in the Permian as it expects to deliver solid production growth in 2018 and beyond.

The company’s unmatched depth of low-cost inventory and balance sheet allow it to compete favorably in both mild and moderate recovery case scenarios. In addition to asset and financial strength, many analysts feel that Pioneer offers the second highest multiple contraction among the large-cap Permian pure-play peers, as well as the highest free-cash-flow yield.

Investors are paid a tiny 0.05% dividend. Stifel has set its price target at $325. The consensus figure is $242.49, and Pioneer closed on Friday at $180.95 a share.

These five top energy stocks to buy have outstanding upside potential. It should be noted that these plays are better suited for more aggressive accounts and could be volatile going forward, especially if pricing dramatically declines or earnings surprise to the downside.