One sector that has been on a wild roller coaster ride this year has been energy. After the stunning dip for oil futures into negative territory back in April, the black gold has rallied smartly back up near the $40 level. While $40 per barrel is hardly a huge moneymaker, it at least provides a little cushion for some operators with good balance sheets and manageable debt.
In a series of new reports, Neal Dingmann, the well-respected lead energy analyst at SunTrust Robinson Humphrey, has upgraded three companies to a Buy rating from Neutral, as well as raising their price targets. With gasoline prices for the summer driving season expected to be the lowest in years, and many Americans still nervous about air travel, demand could be poised to jump.
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Here are the three new stocks to Buy at SunTrust. It’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Earthstone Energy
The SunTrust team is very positive on this small-cap energy play. Earthstone Energy Inc (NYSE: ESTE) is a growth-oriented independent oil and gas exploration and production company engaged in developing and acquiring oil and gas reserves through an active and diversified program that includes acquiring, drilling and developing undeveloped leases, asset and corporate acquisitions and exploration activities, with its primary assets located in the Midland Basin of west Texas, the Eagle Ford trend of south Texas and the Williston Basin of North Dakota.
While less known than the other stocks receiving upgrades, this may be a solid pure-play for aggressive investors seeking a higher share count. The analyst noted this in the report:
Earthstone continues to be one of the most financially stable & operationally efficient small cap exploration and production stocks with minimal debt, consistent Midland wells, and low overhead/operating expenses leading to sustainable spending within cash flow. The stock currently trades at nearly the deepest discount of any stock we cover versus the group average. We believe the discount is due to limited float among other things with management noting interest in potential accretive acquisitions & other strategic options.
The SunTrust price target for the stock was raised to $6 from $3, and the Wall Street consensus target is $3.92. The stock closed Thursday’s trading at $3.04 per share, up almost 15% 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.
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The SunTrust analyst said this about the company in the research report:
We forecast Diamondback Energy to have a notably better free-cash-flow profile next year versus current Street estimates with our forecast pointing to a ~10% 2021 free-cash-flow yield despite our conservative price deck and little to no production growth as focus should remain on shareholder returns. The company’s industry leading costs and operational efficiencies are primary reasons why Diamondback generates the most cash flow per barrel in our group. Our forecast for continued low drilling and completion activity through much of 2021 will be aided by a strong differentiated unit cost inventory that should provide an efficient bridge until commodity prices justify more incremental drilling.
The SunTrust lifted its $45 price target to $52, which compares with the higher consensus target of $55.98. The last trade for Diamondback Energy stock on Thursday was reported at $43.62 a share, after a 4% gain for the day.
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. The company has updated 2020 and 2021 hedging adding $1.2 billion to cash flow estimates over next two years, and it added a new $900 million credit facility that further enhances liquidity. In addition, the Gulf coast marketing makes Pioneer less exposed to widening Midland differentials.
This stock remains a top play for energy investors, and the analyst pointed this out:
We believe there is much more room for this industry long stock to run as we forecast Pioneer’s 2021 free-cash-flow to handily top Street estimates generating $800 million+ as the company maintains stable production while continuing to lower capital spending as a result of industry leadings costs (including low interest/other corporate expenses), efficiency gains, and service cost deflation.
The $90 SunTrust price target got a big boost to $120. The posted consensus target was last seen at $114.62, and Pioneer Natural Resources stock closed most recently at $97.70 per share, which was up 6% on Thursday.
The bottom line is that while the energy sector is now regarded as an almost contrarian play, the odds are in investors’ favor. While the spot price has moved higher, it is still below the level at which it is likely to finish 2020, as the economy comes back to life in the second half of the year. This bodes well for investors with a longer time horizon.
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