After years of oil surpluses, which peaked in 2016 as oil plunged to the $26 level, the market has finally started to rebalance, and much of that is thanks to the OPEC and other countries that cut production. While OPEC most likely will be looking to exit the production cuts, it could take until the end of 2018 for the cartel to complete its inventory rebalancing initiatives.

A new RBC research report raises the firm’s oil price estimates across the board for the next two years. West Texas Intermediate crude is seen averaging $54 a barrel in 2018 and $56 in 2019. It should be noted that oil currently trades at $57.91, which is above both estimates, but the RBC long-term price estimate for the black gold is set at $65.

In the report the analysts focus on four top small and mid-cap exploration and production stocks as top picks. It’s important to note that across the firm’s coverage list, the price targets were raised on an average of 1%.

Callon Petroleum

This is one small cap stock that RBC feels comfortable about currently. Callon Petroleum Co. (NYSE: CPE) is an independent oil and natural gas company engaged in the exploration, development, acquisition and production of oil and natural gas properties. It focuses on the acquisition and development of unconventional oil and natural gas reserves in the Permian Basin.

The company’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 had owned leaseholds in 39,570 net acres in the Permian Basin, all of which was located in the Midland Basin.

RBC loves the strong EBITDA growth at the company and the report said this:

We think the company could be one of the most capital efficient growers in our universe, with 20%+ per annum growth possible for several years with a cash flow surplus. Asset quality is strong, and upcoming potential catalysts include the company’s first operated Spur well results along with the first Wolfcamp C test in Ranger. We also believe Callon could be a takeout target in the future.

The RBC price target for the shares is $15, and the consensus target is $15.38. The shares closed trading on Thursday at $11.88.

Carrizo Oil & Gas

This is a top energy stock for value buyers to consider. Carrizo Oil & Gas Inc. (NASDAQ: CRZO) is a Houston-based energy company actively engaged in the exploration, development and production of oil and gas from resource plays located in the United States. Carrizo’s current operations are principally focused in proven, producing oil and gas plays, primarily in the Eagle Ford Shale, the Utica Shale in Ohio, the Niobrara Formation in Colorado and the Marcellus Shale in Pennsylvania.

Many on Wall Street see the company as one of the best positioned due to the low breakeven costs, solid operating scale and a very good balance sheet with ample liquidity. Top analysts also think they company may take advantage of difficult situations for others and make acquisitions, especially in the Eagle Ford.

The company has looked to refocus core growth in 2018, and RBC explained how:

Carrizo has recently made a transition from a fairly diversified company with an Eagle Ford focus to a more simplified E&P with core assets exclusively in the Eagle Ford and the Delaware Basin. We think results in the Delaware are likely to surprise to the upside, and the company’s acquisition economics are already very well supported by historical well results. Carrizo multiple has yet to reflect its recent asset base transformation or its underlying growth potential (<6x 2018 EBITDA). We also believe they have the ability to grow within cash flow in 2019+, which could surprise to the upside.

RBC has a $24 price target, but the consensus target is higher at $26.63. Shares closed Thursday at $21.53.

Parsley Energy

This is another smaller capitalization stock for aggressive investors to consider. Parsley Energy Inc. (NYSE: PE) is an oil and gas producer with 227,000 net acres in the Permian Basin. The majority of acreage sits on the Midland side of the basin, but the company also holds a small acreage position in the Delaware Basin.

The company had 222 million barrels of oil equivalent of proved reserves at the end of 2016, of which 61% was oil. Through strategic acquisitions and acreage swaps, it has grown its acreage position since its initial public offering and has over 7,900 horizontal locations across multiple prospective zones.

RBC likes the company’s Permian exposure and said this:

Key factors that drive outperformance include a core Permian asset base, 50%+ oil growth in 2018E, a more managed cash flow & capital spending outlook, and a strong balance sheet. The company is capable of FCF neutrality by mid-2019, assuming flat activity levels. If crude oil prices remain above $50/bbl (WTI), free-cash-flow neutrality is likely more “conceptual”, in our view, because value creation will come organically through the drill-bit.

The $36 RBC price target compares with the consensus estimate of $37.90 The shares closed Thursday at $29.21.

RSP Permian

This was a fall addition to the RBC Global Energy Best Ideas list. 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.

The company has caught a string of upgrades from top Wall Street companies this past 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 RBC report noted this:

The company trades in line (2019 Enterprise Value/EBITDA) with Permian peers but has one of the best debt-adjusted production growth outlooks among peers. Cash margins per boe are also amongst the best in the industry. There is visibility for 30%+ growth in 2018 and 2019 at cash flow levels assuming $50-55/bbl. We expect management to remain disciplined, as it has demonstrated before, if oil prices weaken and maintain a cash flow neutral bias. We see further upside to our valuation through improving capital efficiency in the Delaware and expanding resource potential in both its operating areas.

The RBC price target is $47. The consensus target is $46.03, and shares closed most recently at $39.82.

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These four top stocks all have decent upside to the RBC price targets and are top picks for 2018. With the end of the year coming up, it may make sense to buy partial positions now and wait for trading in January before adding additional shares.

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