The time has come for the exploration and production stocks to report earnings, and with Exxon Mobil and Chevron both missing the mark last Friday, the question for investors is where to place their bets. The disappointing results come as much of the U.S. oil industry has been recovering from a three-year downturn in the energy sector, bolstered by higher production and crude prices.
The good news is that West Texas Intermediate continues to hover above the $70 a barrel mark, and that’s very positive for the top-tier exploration and production companies. With many of the companies reporting this week and next, we screened the Merrill Lynch energy research database for the biggest players that are rated Buy. We found four that look like solid picks now.
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 Merrill Lynch price target for the stock is $127, and the Wall Street consensus target is $125.43. The shares closed Friday at $99.01. The company is expected to report August 7.
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.
Merrill Lynch has a $210 price target, and the consensus target is $182.26. Shares closed Friday at $148.31. The company is scheduled to report Wednesday, August 1.
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.
The $180 Merrill Lynch price target is well above the $163.53 consensus target. Shares closed Friday at $132.34. Look for the earnings report mid to late next week.
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 receive a 0.05% dividend. The Merrill Lynch price target is $265. The consensus figure is $243.72, and Pioneer closed most recently at $186.02 a share. The report is expected on August 7.
These four top stocks to buy into earnings 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.