Since oil hit the lows of $26.21 a barrel in January of 2016, the price has rebounded sharply, and recently a barrel of West Texas Intermediate reached almost $74 in June. Given that oil has rallied almost 200%, one would think that the prices of energy companies would do the same. While many are off their lows from two and three years ago, a new Baird research report makes the case that many of the top companies are trading at a discount:
The stocks are trading at 80% of current net asset value of NAV using NYMEX prices. The 2018 WTI/Henry Hub average prices, including futures, are $66.42/$2.92, respectively. The 2023 futures (the basis of our long-term NAV price assumptions) are $55.25/$2.68. Over at least the past 10 years, the exploration and production group has tended to trade close to NYMEX NAV. The median stock on our coverage list has 36% potential upside to its 12-month price target.
Baird covers these four large-cap exploration and production stocks, and all four are rated Outperform. Their stocks make sense for growth accounts looking to add energy exposure.
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.
Cimarex investors are paid just a 0.3% dividend. The Baird price target for the stock is $136, and the Wall Street consensus target was last seen at $124.65. The shares traded early Monday at $89.00 per share.
This company has very large exposure to crude oil. Continental Resources Inc. (NYSE: CLR) is primarily a producer of onshore U.S. oil and has positioned itself in two growing hydrocarbon discoveries in the country: 1) the Bakken oil play in Montana and North Dakota, and 2) the SCOOP/STACK in Oklahoma, giving the company good growth opportunities for years to come.
Many on Wall Street feel that the company’s investment thesis is virtually unmatched. Investors get core Permian-like acreage at a non-Permian valuation. Of greatest importance, Continental is one of few diversified large-cap stocks that offers investors exposure to low-cost oil outside of the Permian. With current capacity and distribution issues in the Permian, this is another solid reason to own shares.
Baird has a $75 price target for the shares, which compares with the consensus target of $74.66 The shares at $64.70 Monday morning.