When 2020 started, things were looking solid for the energy sector and oil. Then to make things even spicier, a little geopolitical volatility was tossed into the mix when U.S. forces killed Iranian Major General Qasem Soleimani. That quickly spiked benchmark West Texas Intermediate crude to close to $63 a barrel. In just under two months, though, the price has dropped a stunning 15%.
Despite the excitement over the electric vehicle revolution, and the constant climate change chatter, the world continues to need fossil fuels, and the time may be right for some selective buying in the sector.
Some across Wall Street are making the case that the outlook for oil looks bleak, with the possibility of a major China slowdown risking significant revisions to global growth, and OPEC is extending production cuts through June, and may cut production yet again. In addition, with U.S. production slowing, a backstop may have been put in place for oil prices around the $50 level.
The analysts at Goldman Sachs are focused on three top companies with Buy-rated shares and solid free-cash-flow potential, a metric Wall Street is very focused on now.
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.
The company reported strong earnings but still has a lot of upside to posted price targets. Goldman Sachs was very positive on fourth-quarter results and 2020 guidance, noting this:
Results were strong relative to our/Street expectations driven by a combination of greater production (both oil and natural gas) as well as lower cash costs (particularly G&A) vs. our forecasts. With results, the company initiated 2020 production guidance that was broadly in line with expectations (midpoint of oil production guidance was in line relative to consensus expectations), while the midpoint of Conchos’ $2.6-$2.8 billion exploration/development capex guidance is 3% below consensus, suggesting greater capital efficiency all else equal.
The company pays a small 0.61% dividend. The Goldman Sachs price target for the stock is $105, but the Wall Street consensus target is slightly higher at $107. Concho Resources stock closed trading on Wednesday at $82.45 a share, up almost 8% on the day.
This top Permian Basin play for more aggressive accounts 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.
Diamondback’s activities are focused primarily on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.