When 2020 started, things were looking solid for the energy sector and oil. Then to make things even spicier, a little geopolitical volatility was tossed into the mix when U.S. forces killed Iranian Major General Qasem Soleimani. That quickly spiked benchmark West Texas Intermediate crude to close to $63 a barrel. In just under two months, though, the price has dropped a stunning 15%.
Despite the excitement over the electric vehicle revolution, and the constant climate change chatter, the world continues to need fossil fuels, and the time may be right for some selective buying in the sector.
Some across Wall Street are making the case that the outlook for oil looks bleak, with the possibility of a major China slowdown risking significant revisions to global growth, and OPEC is extending production cuts through June, and may cut production yet again. In addition, with U.S. production slowing, a backstop may have been put in place for oil prices around the $50 level.
The analysts at Goldman Sachs are focused on three top companies with Buy-rated shares and solid free-cash-flow potential, a metric Wall Street is very focused on 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 reported strong earnings but still has a lot of upside to posted price targets. Goldman Sachs was very positive on fourth-quarter results and 2020 guidance, noting this:
Results were strong relative to our/Street expectations driven by a combination of greater production (both oil and natural gas) as well as lower cash costs (particularly G&A) vs. our forecasts. With results, the company initiated 2020 production guidance that was broadly in line with expectations (midpoint of oil production guidance was in line relative to consensus expectations), while the midpoint of Conchos’ $2.6-$2.8 billion exploration/development capex guidance is 3% below consensus, suggesting greater capital efficiency all else equal.
The company pays a small 0.61% dividend. The Goldman Sachs price target for the stock is $105, but the Wall Street consensus target is slightly higher at $107. Concho Resources stock closed trading on Wednesday at $82.45 a share, up almost 8% on the day.
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.
While the fourth-quarter results came in below expectations, Goldman Sachs remains positive on future growth and free cash flow potential. The analysts said this in the research report when discussing the 2020 potential:
We see potential for improved capital efficiency versus 2020 guidance via: (1) lower service costs — The company does not include service cost benefits in guidance, but indicated current service costs could drive low-single digit reduction in well costs; and (2) Delaware Basin cost efficiencies — Diamondback Energy sees room for further cost efficiencies in the Basin, though guidance is based on well costs above 3Q levels. This could result in production growth above the midpoint of 10%-15% guidance. We remain Buy-rated and believe current valuation does not reflect the company’s differentiated debt-adjusted production growth, corporate returns and return of capital to shareholders (annualized dividend doubled to $1.50/share, or ~2% yield).
Goldman Sachs has a price target of $107, but again the consensus target is higher, this time at $123.27. Diamondback Energy stock closed most recently at $79.298, after rising more than 6% on the day.
Enphase Energy
While somewhat off the radar, this is a top clean energy pick for investors to consider. Enphase Energy Inc. (NASDAQ: ENPH) is a global energy technology company that delivers smart, easy-to-use solutions that connect solar generation, storage and management on one intelligent platform.
The company revolutionized solar with its microinverter technology and produces the world’s only truly integrated solar plus storage solution. Enphase has shipped more than 23 million microinverters, and approximately a million Enphase-based systems have been deployed in 130 countries.
Enphase Energy recently announced that Solair, a commercial solar installation and green energy consulting firm based in Delaware, is deploying the company’s microinverters on commercial solar projects to precisely right-size systems for financial incentives and interconnection requirements, improve installation time and issue production guarantees with confidence.
The company posted stellar results, prompting the analysts to say this:
Enphase posted a strong beat in the fourth quarter of 2019 and guided to first quarter top line growth well above expectations, keyed in large part by ongoing market share gains, in our view. While US resi solar fundamentals are notably strong heading into 2020, we believe the company’s growth story is becoming quite secular in nature, given the aforementioned share gain potential which appears to be showing upside in Tier-1 installers as well, battery storage traction and more end market/geographic expansion slated for the rest of this year and into next.
Goldman Sachs loves the secular growth story on battery storage and the European exposure, and the team has raised the price target to $50 from $34, though it may be going much higher. The posted consensus target is $36.67, and the last trade of Enphase Energy stock on Wednesday came in at $57.22, up a massive 42% on the day.
These two top conventional oil and gas plays and a clean energy pick could be poised for continued massive runs. Energy stocks, while somewhat out of favor now, do offer investors with a bigger risk appetite some interesting upside potential, even if just from a trade standpoint.
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