Even though oil has stayed above the critical $50 a barrel level, the energy sector has been a big disappointment this year. While the S&P 500 is up almost 20% this year, the energy sector, as measured by the Energy Select SPDR ETF (NYSE: XLE), is essentially flat. This comes despite the fact the sector has seen some price premium moved in as Saudi Arabia had production capabilities bombed and Iran recently had a tanker attacked.
So what does this mean for investors? With the U.S. shale and production story slowing, and many companies now focused on free cash flow, what is the best move for investors who see value but remain cautious?
The analysts at RBC are very positive on four large-cap exploration and production energy stocks, and with good reason. With the shift toward free cash flow as a major metric of interest, these all score well in that category. The RBC report noted this with earnings on the horizon:
During the coming week or two, we will get a better taste for the market’s appetite for US E&Ps with most of our coverage scheduled to report. In our third quarter 2019 earnings preview we highlighted that investors will be focused on capital spending plans and activity in 2020 with some companies providing initial budgets for next year. Operators appear keenly attuned to investor preference for shareholder return over growth with share buybacks as the preferred mechanism. Notably, we anticipate that spending should taper further with most operators continuing to reduce rig and frac crew counts in year-end 2019 before modestly picking back up in 2020.
The four Outperform-rated stocks are some of the leading companies in the industry, and their shares all have at least 50% upside to RBC price target.
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 offers investors a small 0.76% dividend. The RBC price target for the shares is $104, and the Wall Street consensus target is $116.69. The stock closed trading on Friday at $65.82 per share.
This is a top Permian Basin play for more aggressive accounts, and it could be a takeover target. 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 Basin in West Texas.
Diamondback Energy’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.