With oil hitting the lowest price since 2002 this week, many people are throwing in the towel and selling everything. Typically, that is the time when investors looking to make some serious money get interested. While demand has indeed dropped during the coronavirus pandemic, the real problem has been an oil production fight between Saudi Arabia and Russia. That fight broke out just as the outbreak was ramping up.
Long-time investors know that this won’t last forever, and reportedly President Trump has already been in touch with Russian president Putin to discuss the ongoing production battle. That discussion appears to have at least calmed some of the oil sector participants.
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A new Stifel research report focuses on companies in the sector that can handle the huge benchmark price drops. While the analysts remain concerned over debt that matures at companies in the sector, as does the possibility of more dividend cuts, free cash flow remains a key metric. The analysts’ “survivors” group has one positive thing in common: they hedged production. The report noted this:
Our group has hedged an average of 70%/41% of its projected 2020/2021 oil production at an average floor price of $50/$49. Two-thirds of our coverage has hedged more than 60% of this year’s estimated volumes, while more than two-thirds of our group has hedges covering less than 30% of projected 2021 volumes.
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The analysts also said this about the “survivors”:
All six companies can withstand weak oil prices over the next four years, in our view. By our estimates, all of these companies will have sufficient liquidity to retire debt maturing over the next four years. In fact, Noble, Parsley and Cimarex will not be required to tap their credit facilities. Bonanza will need a modest draw (less than $20 million) to retire $80 million of debt due in 2023, while PDC will need a draw of $230 million over the next four years on a currently undrawn revolver with an elected commitment of $1.7 billion.
All six companies are raised to Buy from Hold and all are very solid selections for accounts with a longer time perspective and a higher risk temperament, that can look past the current disruptions and dislocations in the sector.
Bonanza Creek Energy
This company is way off the radar but offers solid upside potential. Bonanza Creek Energy Inc. (NYSE: BCEI) engages in the extraction of oil and associated liquids-rich natural gas. It focuses on the Niobrara and Codell formations in the Denver-Julesburg Basin.
Recently the company announced full year 2020 production is expected to be 24,000 to 25,000 barrels of oil equivalent per day. Total 2020 annual capital expenditures are expected to be $80 million to $100 million, excluding the completion of the two pads in late 2020. Outside-operated activities in French Lake are now expected to start in 2021. A flat 2020 production profile, together with reduced capital spending and 2020 hedge revenue, is expected to generate significant free cash in 2020. In addition, the company expects to exit 2020 with no debt.
The Stifel price target jumped to a whopping $34 from $13. The Wall Street consensus target is $20.67, and the shares ended trading on Tuesday at $11.25 after rising almost 23%.
Cimarex Energy
This is a top play for investors looking to the Permian Basin. Cimarex Energy Co. (NYSE: XEC) is an independent exploration and production company. Its primary activities are in the Mid-Continent and Permian Basin areas of the United States.
The company focuses on increasing shareholder value through strategies linked to generating attractive economic returns on capital employed and profitable growth in per-share reserves, production and cash flow. It intends to profitably grow reserves and production through a balanced mix of exploration, exploitation and acquisitions.
Investors receive a 5.25% dividend, which may be lowered or eliminated. The Stifel price objective for the stock is $35, up from the previous $18. The consensus price target is much lower at $23.11. Cimarex Energy closed at $46.98 on Tuesday.
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EOG Resources
This leading energy company is also a top pick across Wall Street. EOG Resources Inc. (NYSE: EOG | EOG Price Prediction) is one of the largest independent exploration and production companies operating in the United States, Canada, Trinidad, the United Kingdom and China.
Despite some rough going over the past month, in February the company did post adjusted fourth-quarter earnings that beat consensus expectations on better realizations, lower operating expenses and depreciation, depletion and amortization. The company had $440 million of free cash flow generated after dividends.
Shareholders receive just a 0.95% dividend. The $49 Stifel price target was raised to $73, while the consensus target is only $39.52. EOG Resources stock closed at $16.83, up just over 13% on Tuesday.
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Noble Energy
Noble Energy Inc. (NYSE: NBL) is an independent energy company engaged in the acquisition, exploration and production of crude oil, natural gas and natural gas liquids worldwide. Its principal projects are located in Denver-Julesburg Basin, Marcellus Shale, Eagle Ford Shale and Permian Basin of the United States, as well as in deepwater Gulf of Mexico, offshore Eastern Mediterranean and offshore West Africa.
The company has been in the process of a reset in operating cash flow toward gas in Israel, which trades at above two times U.S. gas prices and could substantially contribute to cash flow this year.
Stifel boosted the price target to $18 from $9, while the consensus target is $14.47. Noble Energy stock climbed over 13% on Tuesday and closed at $6.04.
Parsley Energy
This is another small-cap 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. 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
The company is catalyst rich and a Permian Basin pure play. Parsley Energy has some of the strongest wells in the basin, generating returns that are among the best in the industry. It is also rapidly de-risking its drilling inventory and is well positioned to continue to beat its strong growth projections.
The $11 Stifel price target was raised to $13, which compares to the $15.94 consensus price target and the most recent close at $5.73. Shares rose just under 20% on Tuesday.
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PDC Energy
This is another smaller cap name, and another somewhat off-the-radar play, but it has tantalizing assets for a company looking to add growth potential. PDC Energy Inc. (NYSE: PDCE) is a diversified small-cap exploration and production firm with assets in the Rockies, Permian and Utica Shales. The company’s core position is in the Wattenberg, with 100,000 net acres alongside the recently acquired 55,000 net acre position in the Permian Basin.
The company was targeting 10% to 15% production growth in 2020, and operating progress continues with operating expenses improving and well cost declining in the Delaware with longer laterals and modified completion design.
Though upgrading it to Buy from Hold, Stifel dropped its price target to $11 from $14. The consensus target is $27.28, and the stock was last seen trading at $6.21, up over 8% on the day.
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All these stocks have been eviscerated by the relentless and withering selling. However, the analysts have done their work by looking for companies that are poised to survive this year and hang around until prices improve. While these are not for conservative accounts, there could be some big money made on these names. In addition, it’s not out of the question that all could be ripe candidates if some of the expected massive industry consolidation takes place over the rest of 2020 and next year.
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