Despite the sharp rise in oil prices, some of the top stocks have continued to trade at less than their net asset value using current NYMEX price. With supply becoming stretched as a result of the sanctions placed on Iran and the continuing issues in Venezuela, there is a good chance the price of West Texas Intermediate can stay over the $70 a barrel level the rest of 2018. While that is tough for consumers, it is huge for some of the top exploration and production companies.
In a new research report, the energy team at Baird feels the discount to net asset value is an important metric for investors to consider.
The Baird team noted this in the research report:
The stocks are trading at 85% of current net asset value (NAV) using NYMEX prices. The 2018 WTI/Henry Hub average prices, including futures, are $67.76/$2.94, respectively. The 2023 futures (the basis of our long-term NAV price assumptions) are $58.15/$2.64. 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 28% potential upside to its 12-month price target.
Here we focused on the large capitalization companies, and Baird has four that are rated Outperform.
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 in Cimarex are paid a small 0.77% dividend. The Baird price target for the stock is $136, and the Wall Street consensus target was last seen at $121.88. The stock closed Friday’s trading at $92.94 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.