4 Small and Midcap Energy Stocks to Buy Now

By Lee Jackson Updated Jul 15, 10:58AM EDT · Published Jul 15, 9:05AM EDT

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Bigger isn’t always better, and sometimes when a sector is very volatile like energy, smaller is possibly a way to be much more nimble. In a new report, Cowen starts coverage on small and midcap energy exploration and production (E&P) companies, and it may have found some stocks with solid upside potential.

With the just announced deal with Iran a potential game changer in supply, the Cowen report asserts that E&P stocks are generally anticipating a faster rebound in the price of oil than the current oil futures curve is predicting. They dug deep looking for companies with low capital intensity and the ability to produce strong margins.

The Cowen report highlighted three top pick stocks to buy, and we added one additional stock that Wall Street is very positive on. All are rated Outperform.

PDC Energy

This is Cowen’s top pick, and the stock may offer outstanding upside potential. PDC Energy Inc. (NASDAQ: PDCE) is a domestic independent exploration and production company that produces, develops, acquires and explores for crude oil, natural gas and natural gas liquids, with primary operations in the Wattenberg Field in Colorado and in the Utica Shale in southeastern Ohio. The Wattenberg Field operations are focused on the liquid-rich horizontal Niobrara and Codell plays, and the Ohio operations are focused in the condensate and wet gas portion of the Utica Shale play.

The company reported solid first-quarter numbers that highlighted a big increase in overall production. The Cowen team stresses that investors seemed to be worried about the company’s hedge book, which rolls off in 2017. They feel if oil rebounds to around the $70 level by then, that much of the current concern will prove unwarranted. They also cite the company’s capital efficiency, which ranks in the top quintile of Cowen’s coverage universe.

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The Cowen price target for the stock is a very hefty $76. The Thomson/First Call consensus price target is $69.09. The stock closed Tuesday at $50.95. Trading to the Cowen target would be over a 50% gain for investors from current levels.
Denbury Resources

This stock has been an analyst favorite for years and is number two of the top three Cowen picks. Denbury Resources Inc. (NYSE: DNR) is an independent oil and natural gas company with operations focused on the Gulf Coast and in Rocky Mountain region. Its goal is to increase the value of its properties through a combination of exploitation, drilling and proven engineering extraction practices, with the most significant emphasis relating to carbon dioxide enhanced oil recovery operations.

The analysts think the stock is one of the best ways for investors to play the eventual move higher in the price of oil. They also point out that Danbury’s margins are in the top quartile of the firm’s coverage universe, and they also see the company growing at twice the rate of its peers in 2017, when they see the price of oil rebounding to $70.

Denbury investors are paid a large 4.73% dividend. The Cowen price target is $9 and the consensus target is $9.13. The stock closed on Tuesday at $5.33.

Parsley Energy

This company is the number three top pick at Cowen. Parsley Energy Inc. (NYSE: PE) is an independent oil and natural gas company focused on the acquisition, development and exploitation of unconventional oil and natural gas reserves in the Permian Basin in West Texas. As of December 31, 2014, Parsley’s acreage position consisted of 133,274 net acres, including 103,036 net acres in the Midland Basin and 30,238 net acres in the Delaware Basin. Estimated proved oil and natural gas reserves were 90.9 million barrels of oil equivalent.

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The Cowen team thinks production will increase while capital spending drops going forward. They also think that the southern Midland Basin asset is at the end of the cost curve for U.S. oil productions, and they see the company margins in 2017 being three times that of the coverage universe median.

The Cowen price target is posted at $22, and the consensus estimate is right in line at $22.19. The shares closed Tuesday at $17.42.

Diamondback Energy

This company does not make the top three picks but is Outperform rated and one of Wall Street‘s favorite stocks operating in the Permian Basin. Diamondback Energy Inc. (NASDAQ: FANG) has close to 85% of its reserves in liquids, with 65% oil and 20% natural gas liquids. This has caused the average well to produce between 80% and 90% liquids, which results in high margins. This top company could be a potential takeover candidate, given its high-quality assets in West Texas.

The Cowen analysts forecast production for the company at 10% above the current consensus view in 2016, which is the largest variance in the Cowen coverage universe. The analysts also think that the royalties are terribly undervalued and worth twice as much as the current trading price.

The Cowen price target is set at $89, but the consensus price objective is significantly higher at $94.97. The stock closed most recently at $73.34.

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The proposed deal with Iran will continue to tamp down the price of oil, which has already dropped almost 15% from the recent trading levels near $60. It takes a contrarian view, but now may be the time to scale some money into these smaller E&P companies. All are well run and could potentially be takeover candidates.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.