After plunging into the low $40s per barrel late last year, oil prices had rallied sharply, but recently West Texas Intermediate crude has slid back under the $60 level. While lower oil prices are great for families looking forward to drive or fly to their summer vacations, they continue to keep a lid on energy stock prices, which never kept up with the rising price of oil in 2019 anyway.
A new Stifel research report makes the case that if oil can hold current levels, and rally over the $60 level going forward back, there is a good chance that quality exploration and production stocks could outperform benchmark crude over the second half of 2019.
The analyst’s report noted this:
We believe Exploration and Production valuations, which in many cases approximate proved producing reserve values, are ignoring E&P capital discipline and free cash flow generation; a balanced to slightly under-supplied oil market that is susceptible to supply disruptions; and the high likelihood for further mergers and acquisitions activity within the sector. A lackluster first quarter 2019 earnings season did little to quell investor skepticism while recent inventory builds and trade tension have weighed further on the sector.
Stifel cites six top stocks rated Buy as especially well positioned for the second half, and all potentially could be looked at by larger integrated leaders looking for additional production and growth, especially in the Permian Basin.
Cimarex Energy
This remains 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 focuses 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. Note 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 a 1.35% dividend. The Stifel price target for the stock is a gigantic $112, and the Wall Street consensus target is much lower at $91.52. Shares closed trading on Thursday at $59.12.
Concho Resources
Last year, this company bought RSP Permian for $9.5 billion, and most on Wall Street loved the deal. Concho Resources Inc. (NYSE: CXO) is an independent 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.
Concho Resources reports strong earnings and has lots of upside to the posted price targets.
Concho Resources pays just a 0.50% dividend. Stifel has a gigantic $228 price target, while the consensus target is $155.53. Shares closed at $98.13 on Thursday.
Parsley Energy
This is a 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 its 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 and is 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 also is rapidly de-risking its drilling inventory and is well-positioned to continue to beat its strong growth projections.
The $38 Stifel price target compares with the $27.96 consensus estimate. The stock closed most recently at $18.19.
PDC Energy
This smaller cap name is somewhat off the radar but has tantalizing assets for a company looking to add growth potential. PDC Energy Inc. (NYSE: PDCE) is a diversified exploration and production company with assets in the Rockies, Permian and Utica Shale. The company’s core position is in the Wattenberg, with 100,000 net acres alongside a recently acquired 55,000 net acre position in the Permian Basin.
The company is targeting 10% to 15% production growth in 2020, and operating progress continues with operating expense improving and well cost declining in the Delaware with longer laterals and modified completion design.
Stifel has set a $57 price target on PDC. The consensus target is $57.42, and the shares ended Thursday at $30.53.
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 in 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 its stellar balance sheet, the company looks poised to remain a top player in the Permian because it expects to deliver solid production growth in 2019 and beyond.
Investors receive a 0.38% dividend. The Stifel price target is $322. The consensus figure is $204.61, and Pioneer closed most recently at $144.43.
WPX Energy
This is yet another smaller cap company with solid upside potential and also another top Permian Basin play. WPX Energy Inc. (NYSE: WPX) is an independent oil and natural gas exploration and production company that engages in the exploitation and development of unconventional properties in the United States. Its principal areas of operation include the Permian Basin, the Williston Basin in North Dakota and the San Juan Basin in New Mexico and Colorado.
WPX is a premier Permian-levered operator with sector-leading debt-adjusted cash flow growth supported by strong execution in the core Delaware, all while trading at Williston valuations primarily due to its relatively high financial leverage.
Stifel analysts have a $28 price target. The consensus price objective is $19.50, and shares closed at $10.93.
Obviously, Stifel favors companies with big Permian footprints, and with good reason. The massive purchase of Anadarko by Occidental Petroleum back in March put the spotlight directly on these companies and others in the region as potential takeover targets. That plus the incredibly cheap valuations makes them good additions to growth accounts with a long-term time frame.
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