The week of May 27 brought a welcome sign for the oil bulls. That would be the return to $50 oil, no matter how brief that price was seen. It was not that long ago that oil was under $30 a barrel. Still, the oil and gas sector has been pricing in a more normalized range for some time. We are starting to see a mixed performance in oil stocks now, perhaps because investors have voted on which companies will survive and which ones will continue to struggle.
Investors keep proving that they are willing to buy the big stock market sell-offs. The strategy of “Sell in May and go away” did not come on too strong this month, leaving many bargain hunters seeking value and long-term upside.
24/7 Wall St. reviews dozens of analyst upgrades and downgrades each day, which this becomes hundreds of analyst calls throughout the week. There remains a huge interest in which oil and gas stocks now offer long-term upside for investors. What investors need to consider here is that many oil and gas stocks have risen massively from their lows. Some of the stocks may have even risen by too much. What do pops of 75%, 100% or more tell you?
Investors also need to keep in mind that many energy analysts did not adequately brace for the downside that was seen in 2015. Many of the same analysts also have been late to change their negative bias in the latest run-up.
24/7 Wall St. saw eight analyst upgrades and positive research calls that stood out among the energy sector calls. There were of course other analyst calls, where Buy ratings were reiterated with price target changes.
Before chasing these stocks blindly, investors should understand that oil came a long way down before this rise from the graveyard. Even if oil stays at $50, many companies will continue to operate in a semi-zombie mode. Some companies will continue to enter bankruptcy. And, sadly, there will continue to be more layoffs in energy.
Investors should just assume that it will be some time before we see the higher oil prices reflected into broad industry earnings for the oil and gas sector. S&P sent out a note on Friday saying that the energy sector will post a drop of 106.6% in earnings to quarterly net losses — for the first time since S&P began collecting data.
Another warning here is that energy analysts are almost always making long-term calls rather than short-term ones. These could all see a lot of downside before analysts change their tune. Lastly, if OPEC delivers bad news or if global demand trends start to take oil back toward $40 or lower, these calls will look way too optimistic (if not silly).
Here are eight analyst upgrades and positive research calls covering the energy sector for the week ending May 27.
AmeriGas Partners
On May 26, 2016, AmeriGas Partners L.P. (NYSE: APU) was started with a Buy rating and was assigned a $50 fair value estimate at Janney Montgomery Scott. Its units were trading at $45.77 on Friday’s close, but the yield-equivalent from the distribution here is roughly 8%. Janney’s report said:
The strong yield on what we consider a stable MLP creates attractive opportunities for those in search of higher returns. While our outlook on the domestic propane market in general is neutral, we note that there are plenty of opportunities for growth, especially in the domestic market, given the fragmented nature of the propane market and AmeriGas Partners’ ability to consummate transactions.
Callon Petroleum
Credit Suisse started Callon Petroleum Co. (NYSE: CPE) with an Outperform rating. The May 25 call came with a new price target of $14, which compared with an $11.15 prior closing price. Callon shares closed trading at $11.47 on Friday, but they were at $11.74 on Thursday’s close. The new consensus analyst price target was $13.47, and its 52-week trading range is $4.21 to $12.00.
Energy Transfer Partners
Energy Transfer Partners L.P. (NYSE: ETP) was raised to Buy from Neutral by Goldman Sachs on May 23. The firm’s price target was raised to $40 from $33 and compared with a $36.53 prior close. The master limited partnership (MLP) ended the week at $35.69 a share. The double-digit yield equivalent here also makes the potential upside much higher. This ongoing merger fiasco continues to act as an overhang. Energy Transfer has a $39.87 consensus target price, and the units have a 52-week range of $18.62 to $56.59.
Noble Energy
Sterne Agee CRT raised Noble Energy Inc. (NYSE: NBL) to Buy from Neutral with a $47 price target on May 25. The prior close was at $35.33, and shares traded at $35.88 on Friday’s close. The consensus price target was $41.56 before the call (up to $41.73 on Friday), and the 52-week range is $23.77 to $46.93. Also, Nomura raised its target price to $41 based on deal upside in the Israeli natural gas field.
Pacific Ethanol
Though Pacific Ethanol Inc. (NASDAQ: PEIX) is focused on ethanol, that is now a key component in the oil and gas mix for vehicles. The stock was started with a Buy rating at Rodman & Renshaw on May 24, but it was assigned a whopping $11 price target. This was up well over 100% from the previous $4.65 closing price, but shares surged during the week and the stock closed at $6.07 on Friday. Pacific Ethanol had a consensus analyst target of $9.17 before the call, rising to $9.63 on Friday, and a 52-week range of $2.41 to $12.54. Another amazing issue is that this massive upside would not even mark a 52-week high.
Parsley Energy
Three analysts raise their targets on Parsley Energy Inc. (NYSE: PE) this past week. The calls came after a recently upsized secondary offering of 8.25 million shares. Merrill Lynch took a positive stance on the stock, reiterating a Buy rating with a $27 price objective, versus a $25.70 share price at that time. The analyst calls with higher price targets were seen as follows:
- Nomura reiterated a Buy rating and raised its target to $31 from $25.
- Topeka has a Buy rating and raised its target to $29 from $27.
- KeyBanc has an Overweight rating and raised its target to $29 from $28.
Schlumberger
Schlumberger Ltd. (NYSE: SLB) was added to the prized Conviction Buy list by Goldman Sachs on May 23, and the firm sees some 29% upside. It also sees Schlumberger being best positioned of its peers in the oil patch, particularly now the rival merger was blocked. The consensus price target is $87.74, and the 52-week range is $59.60 to $92.61. Shares closed trading at $77.17 on Friday.
U.S. Silica Holdings
RBC Capital Markets raised U.S. Silica Holdings Inc. (NYSE: SLCA) to Outperform from Market Perform on May 23. This came with a $33 price target, up from a $26.77 prior close. RBC believes that the market is not factoring in the company’s earnings power ahead. Jefferies had talked up U.S. Silica before as well, calling it the best positioned for upside among its peers.
Other top oil and gas stories from this past week:
- Four top MLPs could keep running after big gains.
- Major oil stocks sent short sellers running home to mama.
- Nomura stays bullish on oil and gas.
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