With oil hitting the lowest price since 2002 this week, many people are throwing in the towel and selling everything. Typically, that is the time when investors looking to make some serious money get interested. While demand has indeed dropped during the coronavirus pandemic, the real problem has been an oil production fight between Saudi Arabia and Russia. That fight broke out just as the outbreak was ramping up.
Long-time investors know that this won’t last forever, and reportedly President Trump has already been in touch with Russian president Putin to discuss the ongoing production battle. That discussion appears to have at least calmed some of the oil sector participants.
A new Stifel research report focuses on companies in the sector that can handle the huge benchmark price drops. While the analysts remain concerned over debt that matures at companies in the sector, as does the possibility of more dividend cuts, free cash flow remains a key metric. The analysts’ “survivors” group has one positive thing in common: they hedged production. The report noted this:
Our group has hedged an average of 70%/41% of its projected 2020/2021 oil production at an average floor price of $50/$49. Two-thirds of our coverage has hedged more than 60% of this year’s estimated volumes, while more than two-thirds of our group has hedges covering less than 30% of projected 2021 volumes.
The analysts also said this about the “survivors”:
All six companies can withstand weak oil prices over the next four years, in our view. By our estimates, all of these companies will have sufficient liquidity to retire debt maturing over the next four years. In fact, Noble, Parsley and Cimarex will not be required to tap their credit facilities. Bonanza will need a modest draw (less than $20 million) to retire $80 million of debt due in 2023, while PDC will need a draw of $230 million over the next four years on a currently undrawn revolver with an elected commitment of $1.7 billion.
All six companies are raised to Buy from Hold and all are very solid selections for accounts with a longer time perspective and a higher risk temperament, that can look past the current disruptions and dislocations in the sector.
Bonanza Creek Energy
This company is way off the radar but offers solid upside potential. Bonanza Creek Energy Inc. (NYSE: BCEI) engages in the extraction of oil and associated liquids-rich natural gas. It focuses on the Niobrara and Codell formations in the Denver-Julesburg Basin.
Recently the company announced full year 2020 production is expected to be 24,000 to 25,000 barrels of oil equivalent per day. Total 2020 annual capital expenditures are expected to be $80 million to $100 million, excluding the completion of the two pads in late 2020. Outside-operated activities in French Lake are now expected to start in 2021. A flat 2020 production profile, together with reduced capital spending and 2020 hedge revenue, is expected to generate significant free cash in 2020. In addition, the company expects to exit 2020 with no debt.
The Stifel price target jumped to a whopping $34 from $13. The Wall Street consensus target is $20.67, and the shares ended trading on Tuesday at $11.25 after rising almost 23%.
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 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.
Investors receive a 5.25% dividend, which may be lowered or eliminated. The Stifel price objective for the stock is $35, up from the previous $18. The consensus price target is much lower at $23.11. Cimarex Energy closed at $46.98 on Tuesday.