Oil and the energy sector has been a fickle mistress in recent years. After soaring to over $100 a barrel, the black gold then proceeded to come crashing back to earth in the mid-$20s, all in the past three years. After trading sideways for the better part of 2017, the price seems to have finally stabilized. With global demand increasing, and U.S. exports growing, the investment thesis looks much better for investors.
In a mammoth new report, Jefferies initiates coverage on some of the top U.S. exploration and production companies. Analyst Mark Lear is very bullish on the long-term potential for the shale arena and notes in the report he feels there are a massive 100 million barrels of oil resources that break-even at $50 or lower. This bodes well for the top companies, which have worked to lower costs and maximize production.
Five companies are touted as the analyst’s top picks. Most have big exposure to the Permian and dominate the lower end of the cost curve.
Concho Resources
This Wall Street favorite is one of the top energy plays in the Permian Basin. 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, where it owns 600,000 net acres. The company has 624 million barrels of oil equivalent of proven reserves, of which 57% is classified proved developed and 59% is oil.
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.
Top Wall Street analysts feel that the company’s debt load is below average, as is the firm’s commodity price sensitivity, both of which are big positives for investors.
The Jefferies price target for the stock is $159, and the Wall Street consensus target is lower at $145.72. The shares traded Friday morning at $134.90 apiece.
Diamondback Energy
This is another favorite of Wall Street analysts and 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.
Earnings estimates for the company continue to go higher, and many on Wall Street feel Diamondback can deliver total 2017 numbers that come in above current consensus estimates.
Jefferies has a $124 price target, and the consensus target is $121.53. The shares traded Friday at $101.45.
RSP Permian
As its name might suggest, this is another top player in the Permian. 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 caught a string of upgrades from top Wall Street companies last year and many have pointed to the possibility that the company may very well be a potential takeover candidate. Historically a vertical producer, the company has been transitioning to horizontal drilling the past few years. RSP Permian 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’s margins are amongst the top in the industry. There is visibility for over 30% growth in 2018 at cash flow levels assuming at least $55 per barrel. The analysts feel the company will be proactive and target near cash flow neutrality and remain disciplined if oil prices remain below $50 a barrel.
The $47 Jefferies price target compares with the $44.54 consensus target and the most recent closing share price of $34.24.
Callon Petroleum
This is one of the small cap stocks that Jefferies feels comfortable about now. Callon Petroleum Co. (NYSE: CPE) is an independent oil and natural gas company engaged in the exploration, development, acquisition and production of properties, with a focus on unconventional oil and natural gas reserves in the Permian Basin.
Callon’s drilling activity focuses on the horizontal development of various prospective intervals in the Midland Basin, including multiple levels of the Wolfcamp formation and the Lower Spraberry shale. It owns additional immaterial properties in Louisiana. As of December 31, 2016, the company owned leaseholds in 39,570 net acres in the Permian Basin, all of which was located in the Midland Basin.
Jefferies has set its price target at $16. The consensus target is $15.78, and shares were last seen trading at $10.90.
CONSOL Energy
This is a top natural gas play for investors to consider. CONSOL Energy Inc. (NYSE: CNX) is one of the largest independent natural gas exploration, development and production companies, with operations centered in the major shale formations of the Appalachian basin.
The company’s divisions include Exploration and Production (E&P), Pennsylvania (PA) Mining Operations and Other. The E&P division operates through four segments — Marcellus Shale, Utica Shale, Coalbed Methane and Other Gas — which produce pipeline quality natural gas for sale primarily to gas wholesalers.
CONSOL’s E&P division focuses on Appalachian area natural gas and liquids activities, including production, gathering, processing and acquisition of natural gas properties in the Appalachian Basin. The Other Gas segment is primarily related to shallow oil and gas production and the Chattanooga shale in Tennessee.
The Jefferies price objective is $20, and that compares with the consensus price target of $19.82. The stock was trading at $16.10, giving investors solid upside potential to the Jefferies target.
Five top picks from Jefferies, most of which have massive exposure to the Permian Basin. With demand and exports growing, and pricing finally appearing to be stabilizing, these all make good long-term plays for growth portfolios with a degree of risk tolerance.
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