Energy

Wells Fargo Has 5 Defensive Energy Stocks, Even With Lower Oil Prices

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Investors seeking good bets in the oil and gas exploration and production (E&P) sector are not exactly thick on the ground. Nor are there a lot of good bets on offer. The chief characteristic of the E&P sector seems to be volatility within a range of about $10, from $40 to $50, with occasional brief excursions outside those limits.

With volatility and accompanying uncertainty in mind, analysts at Wells Fargo Securities compared a bear market case ($50 per barrel through 2016, sometimes called “lower for longer”) and a bull market case, where oil returns to around $70 a barrel next year. The analysts found four stocks that ranked in the top 10 in both categories, and just one that also made the firm’s list of top defensive stocks in the sector.

The one stock on both lists and also was one of Wells Fargo’s top defensive names was EOG Resources Inc. (NYSE: EOG). Other stocks that made both the bear and bull lists were Apache Corp. (NYSE: APA), Newfield Exploration Co. (NYSE: NFX) and Diamondback Energy Inc. (NASDAQ: FANG).

In addition to EOG, other top picks to survive a bear market were PDC Energy Inc. (NASDAQ: PDCE) and Concho Resources Inc. (NYSE: CXO).

Wells Fargo’s top defensive picks are EOG, Concho, PDC, Anadarko Petroleum Corp. (NYSE: APC), Rice Energy Inc. (NYSE: RICE) and Gulfport Energy Corp. (NASDAQ: GPOR).

ALSO READ: 3 Defensive Energy Stocks to Buy Now as Sector Struggles Continue

Note that except for EOG, no top bull market stocks made the defensive picks list. That indicates the general direction that the analysts think is most likely:

With regard to the lower for longer scenario, we’ve been calling for a structural shift of the E&P industry since downgrading the group late last year. Judging by our conversations with industry contacts and investors, it feels like most in the space have finally capitulated on a lower for longer commodity price environment. … It feels like survival mode has officially set in.

While most of the analysts’ buyside conversations indicated that crude oil prices were close to a bottom, that did not translate into a willingness to bet real money on it. Wells Fargo says, “Our viewpoint is that we still have one leg lower before we move higher.” And that is due to the fact that valuations have remained high, the stocks are expensive and the belief that “lower for longer” has not yet been priced into shares.

EOG Resources was the only company to finish in the top 10 on both the bear and bull market survivor lists and earn a place on Wells Fargo’s list of top defensive names. The company finished second to PDC Energy on the bear market list and first among the stocks best positioned to take advantage of a bull market. The company’s debt-to-EBITDA ratio is 1.6x, interest coverage is 18.5x, enterprise value-to-debt is 7.1x and capex-to-cash flow is 118%. EOG’s market cap is about $40.4 billion, and its forward price-to-earnings (P/E) ratio is a monstrous 222.48, compared with a still-rich trailing P/E of 28.96.

Apache was another company that made both Wells Fargo lists. The company’s debt-to-EBITDA ratio is 1.9x, interest coverage is 12.5x, enterprise value-to-debt is 3.2x and capex-to-cash flow is 123%. Apache’s market cap is about $14.3 billion, and the forward P/E is a huge 199.53.

ALSO READ: Energy Stocks Are Detested, but Merrill Lynch Has 3 to Buy

Newfield Exploration made both Wells Fargo lists as well. The company’s market cap is about $5.4 billion and its forward P/E is a mere 43.91. The company’s debt-to-EBITDA ratio is 2.3x, interest coverage is 6.4x, enterprise value-to-debt is 3.3x and capex-to-cash flow is 126%.

Diamondback Energy is the fourth of the E&P firms to make both the bull and bear lists at Wells Fargo. The company’s debt-to-EBITDA ratio is 1.2x, interest coverage is 10.4x, enterprise value-to-debt is 10.1x and capex-to-cash flow is 122%. Diamondback’s market cap is about $4.4 billion and its forward P/E is an immodest 61.31.

For comparison, here are Wells Fargo’s data points for its top defensive names (in addition to EOG):

  • Anadarko: debt-to-EBITDA ratio of 3.1x, interest coverage is 6.4x, enterprise value-to-debt is 2.9x and capex-to-cash flow is 108%
  • Concho: debt-to-EBITDA ratio is 2.1x, interest coverage is 9.2x, enterprise value-to-debt is 4.4x and capex-to-cash flow is 107%
  • PDC: debt-to-EBITDA ratio is 1.1x, interest coverage is 13.9x, enterprise value-to-debt is 4.9x and capex-to-cash flow is 91%
  • Rice: debt-to-EBITDA ratio is 4.3x, interest coverage is 3.9x, enterprise value-to-debt is 2.3x and capex-to-cash flow is 248%
  • Gulfport: debt-to-EBITDA ratio is 2.8x, interest coverage is 7.9x, enterprise value-to-debt is 3.9x and capex-to-cash flow is 174%

ALSO READ: UBS Says Huge Oil Merger Should Go Through: 3 Big Stocks to Buy

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