[cnxvideo id=”625447″ placement=”ros”]Just when things looked they were really going the way the oil bulls wanted, the market took a U-turn and has been in a free fall. Since hitting a 52-week high of $54.45 in late February, the price of U.S. benchmark West Texas Intermediate has fallen almost every day for the past two weeks. With prices now in the mid-$48 range, and investor sentiment stating to worsen, the question for investors is twofold: Should the dip be bought? And what stocks can survive in what is rapidly becoming a challenging environment?
A new research report from SunTrust Robinson Humphrey acknowledges that the bloated U.S. inventory and oversupply has trumped the production cuts from OPEC and Russia. The analysts do feel the current domestic oil inventory glut is an anomaly and probably not a long-term thesis. However they caution that any lack of OPEC/Russia follow-through on the cuts could dampen the oil price recovery.
The analysts focused on four top position exploration and production companies that they feel can weather the current environment, based primarily on the analysts’ forecast valuation, growth and financial positions. All four are rated Buy at SunTrust.
Concho Resources
Besides being one of the top energy plays in the Permian Basin, this is also a Wall Street favorite. Concho Resources Inc. (NYSE: CXO) is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties. Its principal operating areas are located in the Permian Basin of southeast New Mexico and West Texas. As of December 31, 2015, its total estimated proved reserves were 623.5 million barrels of oil equivalent.
The company is targeting to deliver 20% oil production growth this year, while investing within its cash flow, a move that many on Wall Street see as very positive. By carefully managing growth and spending, the company looks to be in position to restart the double-digit production growth next year, while many peers are struggling to generate enough excess cash flow to boost output.
The SunTrust price target for the stock is $175, and the Wall Street consensus target price is listed at $167.29. The shares closed Monday at $128.85.
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Diamondback Energy
This is another favorite of Wall Street analysts and another top Permian Basin play. 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 in the Permian Basin. Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past the company’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. Diamondback 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.
Earnings estimates for the company continue to go higher, and many on Wall Street feel Diamondback can deliver total 2017 numbers that come in above current consensus estimates.
SunTrust has set a $130 price target on the. The consensus price objective is at $130.17. The stock closed Monday at $101.25 per share.
Callon Petroleum
This is a small cap stock with which the SunTrust team currently feels comfortable. Callon Petroleum Co. (NYSE: CPE) is an independent energy company focused on the acquisition, development, exploration and operation of oil and gas properties in the Permian Basin in West Texas. The stock has been bludgeoned, down a stunning 33% since hitting a 52-week high back in early December.
In the report, the analysts note that while the company’s debt burden is slightly above average, they see the commodity price sensitivity as being below average. They also see the reinvestment risk as below average as well. They get to the price target using a below-peer 7.4-times multiple applied to their EBITDA estimates for 2018.
The SunTrust price target is a whopping $18, but the consensus target is even higher at $19.38. The stock closed most recently at $11.60.
Earthstone Energy
This is another small cap stock on which the SunTrust team remains very positive. Earthstone Energy Inc. (NYSE: ESTE) is a growth-oriented independent oil and gas exploration and production company. It is engaged in developing and acquiring oil and gas reserves through an active and diversified program, which includes acquiring, drilling and developing undeveloped leases, asset and corporate acquisitions and exploration activities. Its primary assets are located in the Midland Basin of West Texas, the Eagle Ford trend of south Texas and the Williston Basin of North Dakota.
The company announced late last year that, as a result of its lenders’ semiannual review, the borrowing base under its revolving credit facility has been increased from $75.0 million to $80.0 million. Utilization currently includes $10.0 million of indebtedness and $0.2 million of letters of credit. The facility matures on December 19, 2018.
The SunTrust team has a 2018 EBITDA estimate for the company pegged at $150 million, and they get their price target by applying that to an 8.4-times multiple, which is higher than the company’s peers.
SunTrust has a $20 price target for the stock. The consensus target is posted at $18.18. The stock closed on Monday at $12.00 a share.
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While the sell-off in oil has been dramatic, coming in at well over 10%, it’s important to remember that we are just getting out of winter, and with the busy summer driving season not that far away, prices could stabilize and start to move higher again. Plus the record high net longs in the oil futures markets are starting to close positions, and that also could be contributing to weakness.
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