6 Major Oil and Gas Bounce-Back Candidates for 2016


It has been no secret that 2015 was the year that delivered a crushing blow to the oil and gas exploration and production companies. In fact, anything tied to energy seems to have suffered. But what if things have hit rock bottom? Or what if 2016 could be a much better year for the energy patch?

Canaccord Genuity is not calling an exact bottom in the energy patch, but its analyst Stephen Berman has listed several exploration and production companies that could be candidates for a serious bounce back in their shares. The tax-loss selling and window dressing at year’s end have by and large come to an end, and Canaccord Genuity is seeing a potential January Effect for these companies.

Berman has highlighted a handful of Canaccord Genuity’s Buy-rated names that have been hard hit but that could still rebound in the near term. All are said to have potential near-term catalysts or underappreciated financial positions. They come with detailed value analysis on each company’s financial position. Berman said:

Buy them when there is blood in the streets, which we believe there is, and while there is no guarantee of similar returns to what came out of the 2008/2009 recovery, where many SMID-cap E&P names doubled, tripled or more from their depressed market prices, solid returns could await patient investors.

Abraxas Petroleum

Abraxas Petroleum Corp. (NASDAQ: AXAS) was chosen for its strong asset base after its bank group reaffirmed its borrowing base during the third quarter at $165 million. Abraxas is said to be in full hunker-down mode with balance sheet preservation a top priority. Berman actually is calling for about $20 million in positive cash generation through the end of 2017, and he is comfortable with the company’s liquidity situation. An accretive acquisition that adds to the company’s inventory in one or more of its key areas of operation could act as a positive catalyst, in Berman’s view.

Abraxas’s price target at Canaccord Genuity is $3.00, above the consensus analyst price target of $2.36, and versus a 52-week trading range of $0.84 to $3.98. Abraxas closed at $1.20 on Monday.

Bill Barrett

This company was last seen to still have some $349 million left on its $375 million in its borrowing base, and its cash was $112.8 million. Bill Barrett Corp. (NYSE: BBG) also has closed on the sale of non-core properties in the Uinta and DJ Basins for proceeds of $56 million. The company continues to opportunistically seek to divest additional non-core properties and is now marketing its remaining Uinta Basin assets with interest from multiple parties.

Bill Barrett’s price target was $8.50 in Berman’s call. That is more than 100% higher than a recent $4.00 share price. Its consensus price target is $7.08, and it has a 52-week range of $2.75 to $13.36.
Bonanza Creek Energy

Bonanza Creek Energy Inc. (NYSE: BCEI) is now divesting its Rocky Mountain Infrastructure subsidiary for cash of up to $255 million, $175 million of which is to be paid on closing. An additional $80 million is to be paid over a two-year period tied to the company drilling a specific number of wells. The transaction is expected to close by December 31, 2015, but no later than January 31, 2016. Bonanza Creek also has a revolving credit facility with a borrowing base and commitment amount of $475 million (reduced from $500 million in October). As of September 30, 2015, the company had total liquidity of $419 million.

Canaccord Genuity has an $8.00 price target for Bonanza Creek, some 51% higher than the recent price of $5.31. The consensus price target is still much higher at $13.57, and the 52-week range is $3.72 to $30.81. Needless to say, this has been painful to have a Buy rating.

Sanchez Energy

At the end of past quarter, Sanchez Energy Corp. (NYSE: SN) had liquidity of over $750 million, consisting of cash in excess of $450 million and an undrawn bank credit facility with a $500 million borrowing base and $300 million commitment level. Canaccord Genuity sees Sanchez as well hedged on both oil and gas for 2016, despite modeling a $270 million cash burn through 2017. Berman said:

The focus for 2016 will be on the South-Central area of Catarina, where Sanchez has had some of its strongest wells to date, with 30-day rates of ~1,350 Boe/d and EURs the company says are tracking to almost double the Western Catarina 600-700 MBoe type curve. Sanchez believes it has 150 to 200 locations here. The company will be holding an Investor Day in New York City on January 20, 2016, where it will go into greater detail on its assets, particularly Catarina, and should have its YE15 third party reserve report. The Investor Day could serve as a positive catalyst for the stock.

Sanchez Energy’s price target was $12.00 in Berman’s montage call, still above the $9.93 consensus price target. Shares were recently trading at $4.15, which implies close to 200% in upside, if Berman’s stance proves to be correct in 2016. The stock has a 52-week trading range of $3.46 to $16.14.
Whiting Petroleum

According to Canaccord Genuity, Whiting Petroleum Corp.’s (NYSE: WLL) liquidity position remains strong. The borrowing base was reduced recently and it has sold about $400 million in assets and expects more asset sales in the near future — with a larger midstream sale also possible. With about $3.6 billion in liquidity and no meaningful debt maturities until 2019, Whiting is viewed as being in very good financial shape, and it would be an attractive takeover target in what the firm believes will be an accelerating M&A environment in 2016.

Whiting Petroleum still has a nearly unbelievable price target of $30.00 at Canaccord Genuity. That is over 200% higher than the recent $9.00 share price. Whiting’s consensus price target is $25.92. It has a 52-week range of $8.12 to $41.57.

Gastar Exploration

Gastar Exploration Inc. (NYSEMKT: GST) recently announced a successful result on its first STACK Meramec well, producing at a recent 10-day average of 1,042 barrels of oil equivalent per day (Boe/d) (71% oil) and an average of 1,364 barrels of completion fluids per day. Offset operator activity continues to derisk portions of the company’s Meramec acreage with IP rates in closest proximity to Gastar in the range of 560 Boe/d to 1,100 Boe/d and oil production ranging between 65% and 80%.

Earlier this month, Devon Energy agreed to acquire 80,000 net acres in the STACK play from privately held Felix Energy for $1.9 billion. Berman used other relative valuations to get to a $1.25 billion value, twice Gastar’s entire enterprise value. More asset sales are viewed as likely.

At Canaccord Genuity, Gastar’s price target is $2.00. That is 43% higher than the $1.40 most recent close. Gastar has a consensus price target of $2.70 and a 52-week range of $1.00 to $3.79.

As a reminder, aggressive analyst calls of this nature need to come with many caveats. It is very possible that many companies in the oil patch are still nearing a point of no-return. These are “candidates” for bouncing back in 2016. Canaccord Genuity still generally has much more aggressive price targets than the average analyst following these stocks. That also means that maintaining formal buy ratings has come with severe pain. Maybe 2016 will bring a serious oil recovery, but 2016 could just as easily be another year full of pain for energy investors.

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