Energy

UBS Says Buy the Energy Sector Pullback Now: 6 Top Picks

Lee Jackson

Published: March 31, 2017 10:05 am

Last Updated: January 12, 2020 1:26 pm

Across Wall Street we are seeing an interesting trend as many of the big firms are spotlighting the energy sector as a good place to be for the rest of 2017 and beyond. Many think the pullback in oil was more a case of an overbought futures market than an actual drop in demand or overproduction. Plus after doubling from the lows in 2016, it makes sense that a consolidation in the price per barrel would occur before continuing to move higher.

In a new research report, UBS is in group that feels that the concern over inventory builds is overdone. While conceding that inventories are high, and early 2017 builds were above the five-year average, they note that March was below the average. Plus, because of the lag in the OPEC cuts, they have not really fully shown up.

With refinery utilization rising, U.S. inventory draws starting in May, and a huge Russell rebalance that should favor energy in June, prices may be poised to go higher. UBS has six top pick stocks rated Buy.

Anadarko Petroleum

This top company is still down a stunning 43% since 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.

Shareholders receive a 0.35% dividend. The UBS price target is $80, and the Wall Street consensus target is $82.29. Shares closed Thursday at $62.17.

Energen

This lesser known company is a solid choice for those looking for Permian Basin exposure at a reasonable price. Energen Corp. (NYSE: EGN) is an oil and gas exploration and production company with headquarters in Birmingham, Alabama. The company has approximately 775 million barrels of oil-equivalent proved, probable and possible reserves and another 2.5 billion barrels of oil-equivalent contingent resources. These all-domestic reserves and resources are located primarily in the Permian Basin in west Texas.

UBS recently upgraded the stock to Buy and noted this:

Energen is a rare breed, with strong debt-adjusted growth, inventory depth from quality & blocky Permian footprint, balance sheet, and value, in our view. Recent Generation 3 completions showing promise for a step-change in well productivity and none of that appears baked into guidance or street estimates.

UBS has a $72 price target, and the consensus target is $70.38. The stock closed Thursday at $53.83.

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 DJ 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. As of December 31, 2015, the company had approximately 1,421 million barrels oil equivalent of total proved reserves.

Noble sanctioned in February the phase 1 development of its giant natural gas discovery in Israel for a gross development cost of $3.75 billion with first sales expected in late 2019. The project will include the development of 9.4 trillion cubic feet gross from four producing wells, each capable of producing in excess of 300 million cubic feet per day.

Shareholders receive a 1.17% dividend. The $47 UBS price target is less than the consensus target of $48.44. The stock closed Thursday at $34.31.

Parsley Energy

This is another smaller capitalization stock for aggressive investors to consider, and it remains one of the top picks at UBS. 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.

The company had 222 million barrels of oil equivalent in proved reserves at the end of 2016, of which 61% was oil. Through strategic acquisitions and acreage swaps, it has grown its acreage position since its IPO and has over 7,900 horizontal locations across multiple prospective zones.

A UBS report noted:

Parsley Energy staked its position as the second largest E&P in the Midland while retaining the hyper growth profile of a small-cap. Among our coverage universe, the company clearly leads in debt-adjusted growth, well returns, and inventory depth, justifying a premium valuation vs. peers. Its expanded running room in the core can now support continued rig additions, a proven way for value creation at current well returns.

The $42 UBS price target also is less than the consensus target of $44.75. Shares closed at $31.90.

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 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. With a stellar balance sheet, the company is poised to remain the number one independent player in the Permian, as it is expecting to deliver solid production growth again in 2017.

Pioneer investors receive a tiny 0.04% dividend. The UBS price target is $210. The consensus figure is set at $231.40, and shares ended Thursday at $182.48.

WPX Energy

This smaller cap company also has solid upside potential. WPX Energy Inc. (NYSE: WPX) is an independent oil and natural gas exploration and production company focused on unconventional properties in the United States. Its principal areas of operation include the Permian Basin in Texas and New Mexico, the Williston Basin in North Dakota and the San Juan Basin in New Mexico and Colorado.

The UBS recently started coverage of the stock and views it a top beta pick. Their report noted:

We see room for WPX to re-rate via de-leveraging through oil production beats and raises, organic cash flow growth and increase in midstream value. WPX is a premier Permian-levered operator with sector leading debt-adjusted cash flow growth (on par with Parsley Energy) supported by strong execution in the core Delaware, all while trading at a Williston Basin valuation primarily due to its relatively high financial leverage.

The UBS price objective is $17, while the consensus target is $18.38. Shares closed Thursday at $13.01.

All these companies are trading well off their highs, and with all the potential catalysts in front of them, they make for solid buys now. Investors may want to buy partial positions and see how first-quarter earnings come out.