Energy

Oil Company Breakeven Prices Tumbling: 4 Top Permian Basin Stocks to Buy Now

Lee Jackson

Published: February 1, 2017 8:25 am

Last Updated: January 12, 2020 3:17 pm

If you start to combine lower costs with inventory levels going down, the overall outlook for oil stocks is starting to look better and better. It seems hard to believe that just one year ago oil prices were tumbling into the mid $20s and the sector was in disarray. While many companies didn’t survive the huge plunge in price, many prudent exploration and production outfits reined in costs, lowered production and faced the music by biding their time.

A new research report from Jefferies shows the huge declines in wellhead breakeven costs since 2013. In both areas of the Permian Basin, the Midland and Delaware, the costs have been cut in half, with the Delaware being one of the cheapest of all the U.S. major drilling areas.

We then screened the Merrill Lynch research database for companies in the Permian with stocks rated Buy that make sense for investors to consider now. We found four that look very attractive.

Chevron

This integrated giant is a safer way for investors looking to stay long the energy sector, and it has big Permian Basin exposure. Chevron Corp. (NYSE: CVX) is an integrated oil and gas company with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals. It sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas (LNG). Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.

The company’s Permian Basin assets are a goldmine, and that the Australian LNG business will transition from a yearly $8 billion capital consumption drag to a $2 billion to $3 billion contributor. Combined with the much lower overall capital spending for the 2016 to 2018 period, the company is poised to not only hang around, but end the sector slump in a much better position. The analysts note the Permian acreage is profitable at $40 a barrel.

CEO John Watson has made it clear that preserving the dividend for investors is the top priority. Wall Street analysts point out that although the company trades in line with its peers, the growth potential and solid balance sheet deserve a 10% premium.

Chevron investors are paid a very solid 3.88% dividend. Merrill Lynch has a $145 price objective for the stock. The Wall Street consensus price target is $124.46. Shares closed trading Tuesday at $111.35 apiece.

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 this 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.

Merrill Lynch has a $169 price target for the stock, and the consensus target is lower at $161.77. The stock closed Tuesday at $139.44 per share.

RSP Permian

This was one of the production growth leaders in the region over the past two years. 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 firms during 2016, and many have pointed to the possibility that the company very well may be a potential takeover candidate. Historically a vertical producer, the company has been transitioning to horizontal drilling the past few years. The company has conducted five acquisitions since its initial public offering in early 2014 and currently has 1,700 horizontal locations across eight prospective zones.

The company posted solid earnings for the third quarter, and much of Wall Street is focused on the integration of the company’s recently acquired Delaware Basin acreage. The company will report fourth-quarter numbers soon.

The $60 Merrill Lynch price target compares with the consensus target of $52.75. The shares closed most recently a $42.56.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play. 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 the Texas Panhandle.

Pioneer is a huge player in both the Permian Basin and the Eagle Ford, and the company owns more than 20,000 locations in the world’s second largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain the number one player in the Permian as it expects to deliver production growth of 12% or more in 2016, compared to the company’s previous production growth target of 10%. The higher forecast growth rate reflects improving Spraberry and Wolfcamp well productivity.

Pioneer investors are paid a tiny 0.04% dividend. The Merrill Lynch price target is $225. The consensus target price is listed at $214.63. Pioneer closed trading on Tuesday at $180.23 a share.

With the industry looking to the Permian Basin to provide annual production growth, the plunging wellhead breakeven costs in the region are a huge positive. Given the current uncertainty, investors may want to buy smaller starting positions and see if the markets don’t experience a larger pull back this month.