Energy

Analyst Raises Targets on Red-Hot Permian Basin Energy Stocks

Lee Jackson

Published: August 11, 2016 10:05 am

Last Updated: January 13, 2020 4:41 am

One thing became very clear over the six weeks or so that the spot price of oil plummeted earlier this summer. Analysts across Wall Street remained very positive on exploration and production companies that are doing the lion’s share of their drilling in the Permian Basin in West Texas. While many remain very cautious on the overall sector due to the oil pricing volatility, focusing on the best stocks in the best areas looks to be a good plan for investors seeking energy exposure.

In a new report, the energy team at Deutsche Bank also remain cautious. The analysts point to some lingering concerns that producers, regardless of where they are or the state of their finances, are pointing toward higher activity levels and pushing break-even economics lower. The analysts feel that while production should remain way below the 2012-2014 levels, further efficiency gains tilts the equity outlook slightly positive.

We focus on the stocks in the Permian in their coverage universe, and the following three are rated Buy and get big price target boosts.

Concho Resources

Besides being one of the top energy plays in the Permian Basin, this is also a Wall Street favorite. Concho Resources Inc. (NYSE: CXO) is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties.

Earlier this year the company recently announced three separate transactions that enhance its position in the southern Delaware Basin, high grade the company’s portfolio and reduce net debt:

1. It agreed to acquire approximately 12,000 net acres complementary to its core North Harpoon prospect in Ward and Reeves Counties, Texas, from a private operator for total consideration of approximately $360 million, through a combination of common stock, cash and drilling carry.
2. Concho Resources completed an acreage exchange with Clayton Williams Energy, consolidating 21,000 net non-operated acres into a concentrated, operated position adjacent to the Concho’s Big Chief prospect in Reeves County.
3. The company also agreed to sell 14,000 net acres in Loving County, Texas, for cash proceeds of $290 million.

The aggregate impact of these transactions is neutral to Concho’s 2016 capital and production outlook.

The company posted solid quarterly results that beat estimates as production came in above the high end of guidance and costs surprised to the downside. The Southern Delaware basin showed good performance during the quarter.

The Deutsche Bank price target was raised to $150 from $140, while the Wall Street consensus target is $138.01. Shares closed on Wednesday at $128.50.
Diamondback Energy

This remains another favorite of Wall Street analysts and is another top Permian Basin play. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin. Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.

Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow, but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.

The company announced solid numbers for the second quarter and also previously said that production would be higher. In addition, the company continues to lower drilling costs and times. Leading-edge Midland Basin costs to drill, complete and equip wells are currently below $6.0 million for a 10,000 foot lateral well and below $5.0 million for a 7,500 foot lateral well.

During the second quarter of 2016, Diamondback drilled a 10,000 foot lateral well in Andrews County and a 10,500 foot lateral well in Glasscock County in less than nine days each from spud to total depth, a new record for the company.

Deutsche Bank lifted its price target on the stock to $112 from $104. The consensus target price is $105.11, and the shares closed on Wednesday at $93.29.

RSP Permian

This was one of the production growth leaders in the last half of 2015 and into 2016. RSP Permian Inc. (NYSE: RSPP) is an independent oil and natural gas company focused on the acquisition, exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin. The vast majority of the company’s acreage is located on large, contiguous acreage blocks in the core of the Midland Basin, a subbasin of the Permian.

The company has caught a string of upgrades from top Wall Street firm during the spring and summer, and many have pointed to the possibility that the company may very well be a potential takeover candidate. The company reported inline second-quarter earnings, while revenues topped forecasts at $81.5 million.

The prior $39 Deutsche Bank price target was raised to $48. The consensus figure is at $40.79. The stock closed Wednesday at $37.08.

These three outstanding companies continue to be favorites across Wall Street. All are participating in the basin many think is the best in the country, and all are extremely well run.