OPEC Likely to Cut Production: 4 Stocks to Buy

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This fall, and again this week, has surely proved to be one of the most stomach-churning periods for investors since the beginning of 2016. Nowhere was the damage worse than in the energy business, where the benchmark price of oil fell a stunning 35% in just over six weeks. Needless to say, the top stocks in the industry took a beating, but with OPEC set to meet today and tomorrow, it is widely believed it will cut output.

The Stifel energy team thinks the odds are good that the cartel does so, and they selected specific stocks to buy based on two separate production-cut scenarios. In scenario #1, the OPEC cut is 500,000 barrels per day. In scenario #2, the cut is 1 million barrels per day. The team noted this in their report:

Based on our collective marketing and analysis, we believe the market anticipates a +1.0 million barrel per day cut to offset the potential of Iranian waiver extensions and the perceived surge in U.S. production. We currently believe the risk-reward equation is favorable for energy stocks as the upside (Scenario 2 at +15-30%) outweighs the downside (Scenario 1 at -10-20%).

The analysts specifically favor eight top stocks in scenario #2, and here we picked four that look the most attractive now. All four are rated Buy at Stifel.

Continental Resources

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.

Driven by significantly better results when utilizing the high-intensity completions, and having an unhedged 2018 and 2019 oil production profile, Continental Resources is estimated to generate a 5.4% to 5.6% free cash flow yield at the strip. Toss in an expansive low-cost oily resource inventory that could provide decades of drilling locations with a reasonable valuation, and the shares are compelling.

Continental reported record third-quarter production levels as earnings topped analysts’ expectations.

The Stifel price target for the shares is $70, and the Wall Street consensus target is $73.13. Shares closed Tuesday at $47.65.

Parsley Energy

This is smaller capitalization stock for aggressive investors to consider. Parsley Energy Inc. (NYSE: PE) is an oil and gas producer with 227,000 net acres in the Permian Basin. The majority of acreage sits on the Midland side of the basin, but the company also holds a small acreage position in the Delaware Basin. Through strategic acquisitions and acreage swaps, it has grown its acreage position since its initial public offering and has over 7,900 horizontal locations across multiple prospective zones.

The company is a catalyst rich Permian Basin pure play. Parsley Energy has some of the strongest wells in the basin, generating returns that are among the best in the industry. It is also rapidly de-risking its drilling inventory and is well-positioned to continue to beat its strong growth projections.

Stifel has a stunning $54 price target, while the consensus target is $40.35. The stock closed at $29.81 on Tuesday.

Targa Resources

This top energy master limited partnership has had a string of positives lately. Targa Resources Corp (NYSE: TRGP) is a leading provider of midstream services and is one of the largest independent midstream energy companies in North America. Targa owns, operates, acquires and develops a diversified portfolio of complementary midstream energy assets.

The company is primarily engaged in the business of gathering, compressing, treating, processing and selling natural gas; storing, fractionating, treating, transporting and selling natural gas liquids and related products, including services to liquefied petroleum gas exporters; gathering, storing and terminaling crude oil; storing, terminaling and selling refined petroleum products.

Targa Resources has one of the premier asset positions in the Permian basin. With solid management, a strong balance sheet and attractive exposure to some of the most attractive U.S. energy basins, it remains a top pick across Wall Street.

Investors receive an 8.2% distribution. The $63 Stifel price objective is lower than the $61 consensus estimate. Shares closed Tuesday at $45.18.

Whiting Petroleum

This stock was massacred in the fall selling and offers serious upside potential. Whiting Petroleum Corp. (NYSE: WLL) is an independent oil and gas company that explores for, develops, acquires and produces crude oil, natural gas and natural gas liquids primarily in the Rocky Mountain and Permian Basin regions of the United States.

The company’s largest projects are in the Bakken and Three Forks plays in North Dakota, the Niobrara play in northeast Colorado and its Enhanced Oil Recovery field in Texas.

Whiting reported solid third-quarter operating cash flow that exceeded capital spending by $56 million. Production was at the low end of the guidance range. The company’s impressive completion optimization continues along with solid cost controls in place. Whiting offers investors a steady oil-levered growth profile and evolving free-cash-flow prospects.

The Stifel price target is $52. The consensus target is $56.17, and shares closed most recently at $30.82.

These four top Stifel energy picks have been pounded this fall and offer investors solid upside potential. They also range from very aggressive to more conservative, so investors have a solid variety of stocks to match their risk tolerance.