Energy

Permian Basin Leaders Among JPMorgan Top Large Cap 2017 Energy Picks

Lee Jackson

Published: December 9, 2016 8:15 am

Last Updated: January 12, 2020 4:57 pm

One thing we have learned as the energy sector fights back from a huge sell-off that started in the fall of 2014 and bottomed last February is that increasingly the top analysts on Wall Street are focused on the top companies in the Permian Basin in West Texas. That is where the analysts at JPMorgan consider the place to have core stock holdings. The reasons are simple: there is a ton of oil out there, and the cost structures for many of the top players is significantly lower than other operators.

A new JPMorgan research report points to the OPEC production cut as a catalyst for next year, and overall the firm is reasonably bullish for 2017. This was noted in the report:

Following OPEC’s ‘Grand Bargain’ that exceeded our expectations for production cuts, we see more upside for U.S. shale focused E&Ps in 2017, but with greater risks. U.S. shale looks to be a relative winner from the OPEC decision as it signals the cartel’s intention to protect oil prices above a ~$50 per bbl floor, a level at which a significant chunk of the shale cost curve can support value creation from the drill bit at current Oil Field Services costs and production growth.

Four large cap JPMorgan picks for 2017 make good sense for growth accounts with a touch of risk tolerance, and of course, all are rated Overweight at the firm.

Anadarko Petroleum

This top company is still down over 40% from the highs printed in 2014. Anadarko Petroleum Corp. (NYSE: APC) operates through three segments. The Oil and Gas Exploration and Production segment explores for and produces natural gas, oil, condensate and natural gas liquids (NGLs).

The Midstream segment provides gathering, processing, treating and transportation services to Anadarko and third-party oil, natural gas and NGLs producers, as well as owns and operates gathering, processing, treating and transportation systems in the United States. The Marketing segment markets oil, natural gas and NGLs in the United States; oil and NGLs internationally; and anticipated liquefied natural gas production from Mozambique.

The company’s asset portfolio includes U.S. onshore resource plays in the Rocky Mountains, the southern United States, the Appalachian basin and Alaska; the deepwater Gulf of Mexico; and in Mozambique, Algeria, Ghana, Brazil, Colombia, Côte d’Ivoire, Kenya, Liberia, New Zealand and other countries. As of December 31, 2015, it had approximately 2.1 billion barrels of oil equivalent of proved reserves.

JPMorgan noted this in its report:

We see several intriguing near-term catalysts, including incremental asset sales that could support further de-leveraging as well as a simplification of the story as Anadarko looks to focus its U.S. asset base on the three “D’s” —DJ Basin, Delaware Basin, and Deepwater.

Anadarko investors receive just a 0.3% dividend. The JPMorgan price target was set at $70 in the report, but that seems low. The Wall Street consensus price objective is $73.14. Shares closed on Thursday at $70.26.

Devon Energy

This company is expected to have a substantial portion of its total 2016 production in natural gas, and it also resides on the US 1 list. Devon Energy Corp. (NYSE: DVN) an independent energy company, primarily engages in the exploration, development and production of oil, natural gas and NGLs in the United States and Canada. It operates approximately 19,000 wells. It also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensates through its natural gas pipelines, plants and treatment facilities.

Devon Energy’s third-quarter results set the tone for a very solid November after the company reported core earnings that were nearly double what Wall Street analysts were expecting. Fueling that result was the company’s continued ability to push down operating costs, which are now 37% below peak rates.

The analysts had this say:

Devon has an outstanding acreage position in the ‘core of the core’ of the STACK
And Delaware Basin, and a core franchise asset at Jackfish. We believe the company has been under-earning relative to its asset quality in light of the dramatic reduction in drilling activity in the trough of the cycle for balance sheet repair.

Shareholders receive a 0.5% dividend. The $47 JPMorgan price target compares with the consensus target of $49.49. The shares closed yesterday at $47.74.

Range Resources

This is a defensive natural gas stock that many on Wall Street like now. Range Resources Corp. (NYSE: RRC) operates as an independent natural gas, NGLs and oil company. It engages in the exploration, development and acquisition of natural gas and oil properties.

The company holds interests in developed and undeveloped natural gas and oil leases in the Appalachian region of the United States. It owns and operates 4,462 net producing wells and approximately 905,000 net acres under lease in the Appalachian region, and 444 net producing wells and approximately 308,000 net acres under lease in the Texas Panhandle, as well as in the Anadarko Basin of western Oklahoma, the Nemaha Uplift of Northern Oklahoma and Kansas and the Permian Basin of West Texas and Mississippi.

Range Resources markets and sells natural gas to utilities, marketing and midstream companies and industrial users; NGLs to natural gas processors or users of NGLs; and oil and condensate to crude oil processors, transporters and refining and marketing companies. As of December 31, 2015, it had proved reserves of 9.9 trillion cubic feet of natural gas equivalents and will continue to pursue an organic growth strategy targeting high return, low-cost projects within its large inventory of low risk, development drilling opportunities.

According to the JPMorgan report:

The company recently closed its acquisition of Memorial Resource Development (MRD), which operated the low cost Terryville Field in North Louisiana, and now boasts high quality asset bases with attractive firm transportation (FT) agreements in two geographic areas.

Shareholders receive a 0.21% dividend. JPMorgan has a $46 price target. The consensus target is $47.14, and the stock closed Thursday at $38.36.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play, and it recently was upgraded by Deutsche Bank and Citigroup. Pioneer Natural Resources Co. (NYSE: PXD) engages in the exploration and production of oil and gas in the United States. The company produces and sells oil, natural gas and NGLs. It has operations primarily in the Permian Basin, Eagle Ford Shale and West Panhandle field in the Texas Panhandle.

Pioneer is a huge player in both the Permian Basin and the Eagle Ford, and the company owns more than 20,000 locations in the world’s second largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain the number one player in the Permian as it expects to deliver production growth of 12% or more in 2016, compared to the company’s previous production growth target of 10%. The higher forecast growth rate reflects improving Spraberry and Wolfcamp well productivity.

JPMorgan noted:

The next key catalyst for Pioneer’s stock is potential uplift from Version 3.0 of the company’s completion enhancement program in the Midland Basin. Our analysis of State data suggests that the company’s Version 3.0 completions are delivering meaningful well productivity gains above its current completion design.

The JPMorgan price target is $192, while the consensus is higher at $215.51. The shares closed at $187.01.

With the industry looking to the Permian Basin to provide annual production growth, top analysts have acknowledged that challenges such as higher service costs do remain in place. However, many also feel that the environment remains favorable for margin improvement and cash flow growth.