[cnxvideo id=”508131″ placement=”ros”]It never seems to fail. The harder a sector gets hit, the more the negative voices come out when most or all of the damage has been done. That is the kind of advice most investors look to avoid. And when oil got to $26 a barrel earlier this year, plenty were saying it was going lower, and just the opposite has happened. While most of the solid companies have cut costs and improved operational leverage, some look poised to benefit more than others as crude prices continue higher.
In a new research report, Deutsche Bank notes that the $50 level has emerged as a key inflection point for many companies going forward. With West Texas Intermediate crude clawing its way through the mid $40s, we are getting closer and closer to that number. The analysts think it’s clear that at $50 a barrel, hedging and activity starts to increase, and they highlight four companies that they favor for a continued moderate recovery in the sector. All are rated Buy at Deutsche Bank.
ConocoPhillips
This stock may offer investors solid upside potential despite the big dividend cut earlier this year. ConocoPhillips (NYSE: COP) is the world’s largest independent exploration and production company, based on production and proved reserves. Headquartered in Houston, ConocoPhillips had operations and activities in 21 countries, $30 billion in annual revenue, $97.5 billion of total assets and approximately 15,900 employees as of the end of 2015. Production averaged 1,589 thousand barrels of oil equivalents in 2015, and proved reserves were 8.2 billion barrels of oil equivalents as of last December 31.
Many Wall Street analysts feel Conoco can accelerate growth from a reloaded portfolio depth in the Bakken and Eagle Ford, with visibility on future growth from a sizable position in the Permian. The company remains the one of the best values as short sellers circled after the dividend cut as many growth and income managers sold shares.
Investors in Conoco receive a 2.3 % dividend. The Deutsche Bank price target for the stock is $62. The Thomson/First Call consensus price target is $49.38, while Conoco shares closed Thursday at $43.73 apiece.
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Devon Energy
This company is expected to have a substantial portion of its total 2016 production in natural gas. Devon Energy Corp. (NYSE: DVN) an independent energy company, primarily engages in the exploration, development and production of oil, natural gas and natural gas liquids (NGLs) in the United States and Canada. It operates approximately 19,000 wells. It also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensates through its natural gas pipelines, plants and treatment facilities.
Devon’s extensive and very diversified portfolio is primarily composed of unconventional resources and reflects significant long-term growth potential. Consistent investments made by the company over time are helping it to sustain its strong performance despite like many energy giants, having to lower exploration and production budgets for 2016.
Devon investors are paid a 0.75% dividend. Deutsche Bank has a $41 price target. Note that the consensus price target for the stock is much lower at $36.51. The stock closed most recently at $32.72.
Marathon Oil
This company is a leading integrated oil and gas firm with extensive upstream operations. Marathon Oil Corp. (NYSE: MRO) operates through three segments. The North America Exploration and Production segment develops, explores for, produces and markets crude oil and condensate, NGLs and natural gas in North America.
The International Exploration and Production segment explores for, produces and markets crude oil and condensate, NGLs and natural gas in Equatorial Guinea, Gabon, the Kurdistan Region of Iraq, Libya and the United Kingdom, as well as produces and markets products manufactured from natural gas, such as liquefied natural gas and methanol in Equatorial Guinea.
The Oil Sands Mining segment mines, extracts and transports bitumen from oil sands deposits in Alberta and Canada, and it upgrades the bitumen to produce and market synthetic crude oil and vacuum gas oil.
Top analysts cite the company’s higher multiple businesses, and the upstream cash margins have room to move up as shale production increases and oil prices recover. They also point out the stock trades at a very attractive discount to net asset value relative to industry peers.
Marathon investors are paid a 1.61% dividend. The $18 Deutsche Bank target is well above the consensus target of $14.75, as well as the Thursday close at $12.33 per share.
Pioneer Natural Resources
Many Wall Street analysts love this stock for a pure crude oil play, and it recently was upgraded by Deutsche Bank and Citigroup. Pioneer Natural Resources Co. (NYSE: PXD) engages in the exploration and production of oil and gas in the United States. The company produces and sells oil, natural gas and NGLs. It has operations primarily in the Permian Basin, Eagle Ford Shale and West Panhandle field in Texas and in the Raton field in southeastern Colorado.
Pioneer is a huge player in the Permian and the Eagle Ford, and it owns more than 20,000 locations in the world’s second largest oil reservoir in the Midland Basin. With a stellar balance and a reported $2.5 billion in cash on the balance sheet, the company is poised to remain the number one player in the Permian.
The company announced fourth-quarter results in April and posted an adjusted loss of $0.18 per share, which much better than Wall Street analysts’ consensus expectations. Revenues also came in slightly higher than street expectations at $790 million.
Pioneer investors are paid a tiny 0.07% dividend. The Deutsche Bank price target is a solid $180, and the consensus figure is set at $178.90. Pioneer closed trading on Thursday at $167.05 per share.
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Needless to say, the energy sector could still be in for some very difficult times as the overall global production is still a little too much for the markets to absorb. That said, some of the Middle East countries are still running huge monthly deficits, even at current higher prices, and a definitive production cut may improve not only pricing, but get the huge short interest to continue loosening up.
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