With the major indexes up over 20% in 2019, which is looking to come in as the best year for investors since 2013, it has been a banner year for stockholders in almost all sectors. One group that isn’t so happy is energy shareholders, who have suffered not only this year, but for the past few years.
One Wall Street firm predicts that the next few years could bring a turnaround for the top companies in the beleaguered sector, because the turnaround in oil pricing could be dramatic.
A new Raymond James research report sees solid price movement for both benchmarks starting in the second half of 2020. For 2020, West Texas Intermediate crude is expected to average $65 a barrel and Brent $70. For 2021, the analysts see WTI averaging $75 a barrel and Brent $80. Those are huge moves from the current $59.02 for WTI and $64.45 for Brent.
The analysts cite not only the recent OPEC production cuts, but the continuing drop in the domestic oil rig count. The report noted this:
We are updating our oil model and forecast following OPEC’s meeting last week. First, the “good news”: the OPEC+Russia coalition up-sized its production cuts by an additional 500,000 barrels per day. Furthermore, it has become even more evident that U.S. oil producers will take a cautious stance on 2020 capital spending, which translates into an even lower rig count and even slower production growth than we had been modeling.
We screened the Raymond James energy universe looking for companies rated Strong Buy and found six outstanding stocks for investors to consider now.
Concho Resources
Last year, this company bought RSP Permian for $9.5 billion, and most on Wall Street loved the deal. Concho Resources Inc. (NYSE: CXO) is an independent company engaged in the acquisition, development and exploration of oil and natural gas properties.
It offers investors a unique combination of investment themes, including valuation, rate-of-change and resource expansion themes. The company is the largest acreage holder of the publicly traded Permian large-caps and provides investors peer-leading exposure to three of the most impactful catalysts across the Delaware Basin, including the Wolfcamp XY, Wolfcamp D and Bone Spring Shale.
The company has reported strong earnings as well, but it still has a lot of upside to the posted price targets.
Concho Resources pays a small 0.65% dividend. The Raymond James price target is for the shares is $90, and the Wall Street consensus target is $101.09. Shares closed trading on Monday at $76.59.
Continental Resources
This company has very large exposure to crude oil. Continental Resources Inc. (NYSE: CLR) is primarily a producer of onshore U.S. oil and has positioned itself in two growing hydrocarbon discoveries in the country: 1) the Bakken oil play in Montana and North Dakota, and 2) the SCOOP/STACK in Oklahoma, giving the company good growth opportunities for years to come.
Many on Wall Street feel that the company’s investment thesis is virtually unmatched. Investors get core Permian-like acreage at a non-Permian valuation. Of greatest importance, Continental is one of few diversified large-cap stocks that offers investors exposure to low-cost oil outside of the Permian. With current capacity and distribution issues in the Permian, this is another solid reason to own shares.
Shareholders receive a 0.61% dividend. Raymond James has a $40 price objective, while the consensus target is $42.24 level. Shares were last seen at $33.18.
Diamondback Energy
This top Permian Basin play for more aggressive accounts could be a takeover target. 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.
Diamondback’s activities are focused primarily on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past Diamondback Energy’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. It 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 $120 Raymond James price target is lower than the $124.50 consensus target. Shares closed Monday at $83.78.
24/7 Wall St.Marathon Oil
This leading integrated oil and gas firm has extensive upstream operations. Marathon Oil Corp. (NYSE: MRO) operates through three segments. The North America Exploration and Production segment develops, explores for, produces and markets crude oil and condensate, natural gas liquids (NGLs) and natural gas in North America.
The International Exploration and Production segment explores for, produces and markets crude oil and condensate, NGLs and natural gas in Equatorial Guinea, Gabon, the Kurdistan Region of Iraq, Libya and the United Kingdom, as well as produces and markets products manufactured from natural gas, such as liquefied natural gas and methanol in Equatorial Guinea.
The Oil Sands Mining segment mines, extracts and transports bitumen from oil sands deposits in Alberta and Canada, and it upgrades the bitumen to produce and market synthetic crude oil and vacuum gas oil.
Marathon offers investors a 1.61% dividend. Raymond James has set a $20 price target. The consensus target is $17.54, and the stock closed at $12.59 on Monday.
Occidental Petroleum
This energy company made huge news earlier this year with a Warren Buffett backed purchase of Anadarko Petroleum. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals.
The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. Meanwhile, the chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.
The shares have underperformed since the Anadarko acquisition was announced, but the investment case anchored by yield has not changed. With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now.
Shareholders receive a massive 8.10% dividend. The Raymond James price target is a huge $70. The consensus target is $50.55, and the stock closed most recently at $37.33.
24/7 Wall St.Pioneer Natural Resources
Many Wall Street analysts love this stock for a pure crude oil play. Pioneer Natural Resources Co. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.
Pioneer is a huge player in the Permian Basin and in the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. With its stellar balance sheet, the company looks poised to remain a top player in the Permian because it expects to deliver solid production growth going forward.
Investors receive a 1.31% dividend. The Raymond James price target of $180 compares with the $175.61 consensus figure and the most recent close at $133.22 a share.
The bottom line for investors is that energy has drastically underperformed in 2019. With geopolitical turbulence swirling in the Middle East, there could be huge value in owning these stocks as they are somewhat protected from the kind of interruptions that can face international players. In addition, all these stocks are at some of the best entry prices in years and could offer big-time upside in 2020 and beyond if crude prices take off.
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