Deutsche Bank Says Sell-Off in Quality Oil Stocks a Big Buying Opportunity

By Lee Jackson Updated Jan 13, 1:38AM EST · Published Nov 2, 8:25AM EDT

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Deutsche Bank Says Sell-Off in Quality Oil Stocks a Big Buying Opportunity — © Thinkstock

[cnxvideo id=”625456″ placement=”ros”]Just over a month ago, many of the top oil exploration and production stocks got a big boost as there was talk of a potential production cut to be announced at OPEC’s big meeting on November 30. Since then, the enthusiasm has faded and some of the top stocks in the sector are down 10% to 15% as investors feel that the OPEC members may fail to come up with a production cut or freeze.

While the volatility has been painful, it has put some of the top quality stocks on sale. In a new Deutsche Bank research report, top-notch analyst Josh Silverstein makes the case that the sell-off is providing investors with a buying opportunity in high-quality producers. We screened the Deutsche Bank research universe and found five growth companies rated Buy that look outstanding.

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. Its principal operating areas are located in the Permian Basin of southeast New Mexico and West Texas. As of December 31, 2015, its total estimated proved reserves were 623.5 million barrel of oil equivalent.

The company is targeting to deliver 20% oil production growth next year, while investing within its cash flow, a move that many on Wall Street see as very positive. By carefully managing growth and spending, the company looks to be in position to restart the double-digit production growth next year, while many peers are struggling to generate enough excess cash flow to boost output.

The Deutsche Bank price target for the stock is $165, and the Wall Street consensus target is $152. Shares closed Tuesday at $128.60.

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Continental Resources

This company has a very large exposure to crude oil. Continental Resources Inc. (NYSE: CLR) is a top 10 independent oil producer in the United States and is the largest leaseholder and one of the largest producers in the nation’s premier oil field, the Bakken play of North Dakota and Montana. The company also has significant positions in Oklahoma, including its SCOOP Woodford and SCOOP Springer discoveries and the Northwest Cana play.

Continental was one of the companies that Goldman Sachs thought could be able to thrive even with oil at the $35 level. Should it push back toward $50 and higher in 2017, it seems that the upside could be dramatic.

The Deutsche Bank price target is $64, and the consensus target is set at $56.50. Share closed most recently at $49.02.
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 has a $120 price target. The consensus target is $117.23, and shares closed Tuesday at $91.91.

Newfield Exploration

This company has one of the best production mixes, with 45% oil and 37% natural gas, and the balance in natural gas liquids (NGLs). Newfield Exploration Co. (NYSE: NFX) is an independent energy company engaged in exploration, development and production of crude oil, natural gas and NGLs. It is focused on North American resource plays, and the company’s principal areas of operation include the Mid-Continent, the Rocky Mountains and onshore Texas. In addition, Newfield has oil developments offshore China.

One very positive sign for shareholders and potential investors is that earnings estimates for the company have continued to be pushed higher recently. The company just reported third-quarter earnings that barely missed analysts estimates by a penny. Revenues also came in below expectations. The company reported a loss in the same quarter a year ago.

The $50 Deutsche Bank target price is less than the consensus target of $53.03. The stock closed at $40.49.

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 $52 Deutsche Bank price target compares with the consensus figure of $49.88. The stock closed Tuesday at $36.49.

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These five top stocks to buy are largely focused on the Permian Basin, which most firms we cover consider the best area in the country. With all reporting earnings soon, it may be smart to scale in some capital with a small position and see how the results are digested.

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.