Energy

5 RBC Global Energy Best Idea Stock Picks for the Rest of 2017

Lee Jackson

Published: June 29, 2017 8:25 am

Last Updated: January 12, 2020 10:35 am

One of the hardest things to do as an investor is to put money into a sector you know is oversold and has value but worries you when it comes to the actual timing. That is exactly the conundrum facing those looking at energy and wondering when they should put a toe in the water. After a nearly 100% move off the 2016 lows, oil has given back almost half of the move, which is typically a level many professional investors will look at for an entry point.

We decided to screen the RBC Global Energy Best Ideas list for the companies they feel are the best positioned going forward worldwide. Since its inception in February 2013, the RBC Global Energy Best Ideas list is up 16.8%, compared to the S&P Global Energy Sector’s decrease of 12.9%.

Of the 16 companies that made the list, we found five trading in U.S. dollars that look like outstanding picks for the rest of 2017 and beyond. All are rated Outperform at RBC.

Devon Energy

This is a recent addition to the RBC list. Devon Energy Corp. (NYSE: DVN) is an independent energy company that primarily engages in the exploration, development and production of oil, natural gas and natural gas liquids (NGLs) in the United States and Canada. It operates approximately 19,000 wells. The company also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensate through its natural gas pipelines, plants and treatment facilities.

The analysts noted this upon the company’s addition to the portfolio:

Devon trades at a 10% discount on EV/EBITDA to large cap peers despite similar Oil growth rates in 2018. Activity in the Delaware, STACK, and Eagleford should help the company return to growth in the second half of 2017 and we think there could be upside to 2017 production expectations. We expect 8% production growth in 2018 led by high margin US oil production up 15-20%. DVN plans to divest assets worth $1 billion that are non-core, including portions of the Barnett Shale, with an anticipated sale occurring in the next 12–18 months. Proceeds will further enhance the balance sheet but also provide capital to continue to accelerate growth in 2018+, in our view.

Devon investors receive a 0.8% dividend. The RBC price target for the stock is $53. The Wall Street consensus price target is $49.21, and shares closed Wednesday at $30.55.

Energy Transfer Partners

This company merged with Sunoco Logistics Partners last year. Energy Transfer Partners L.P. (NYSE: ETP) engages in the natural gas midstream and intrastate transportation and storage businesses in the United States.

The company’s Intrastate Transportation and Storage segment transports natural gas from various natural gas producing areas, and through ET fuel system and HPL system. It owns and operates 7,500 miles of natural gas transportation pipelines and three natural gas storage facilities in Texas. Its Interstate Transportation and Storage segment provides natural gas transportation and storage services; owns and operates approximately 12,300 miles of interstate natural gas pipeline; and has interests in various natural gas pipelines.

The Midstream segment gathers, compresses, treats, blends, processes and markets natural gas. It owns and operates 35,000 miles of in service natural gas, 31 natural gas processing plants, 21 natural gas treating facilities and four natural gas conditioning facilities.

Energy Transfer unitholders receive a 10.7% distribution. The $30 RBC price target compares with the consensus estimate of $30.86. Shares closed Wednesday at $20.02.

RSP Permian

This was another recent addition to the RBC Global Energy Best Ideas list. RSP Permian Inc. (NYSE: RSPP) is an independent oil and natural gas company focused on the acquisition, exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin of West Texas. The vast majority of the company’s acreage is located on large, contiguous acreage blocks in the core of the Midland Basin, a subbasin of the Permian Basin.

The company caught a string of upgrades from top Wall Street companies last year and many have pointed to the possibility that the company may be a potential takeover candidate. Historically a vertical producer, the company has been transitioning to horizontal drilling the past few years. RSP Permian has conducted five acquisitions since its initial public offering in early 2014 and currently has 1,700 horizontal locations across eight prospective zones.

The RBC report noted:

RSP Permian trades in line (EV/EBITDA) to Permian peers but has one of the best debt-adjusted production growth outlooks in the peer group. The company’s margins are also amongst the top in the industry. There is visibility for over 30% growth in 2018 at cash flow levels assuming at least $55 per barrel. However, we think the company will be proactive and target near cash flow neutrality and remain disciplined if oil prices remain below $50/bbl. We see further upside to our valuation through improving capital efficiency in the Delaware and expanding resource potential in the Midland.

RBC has a $52 price target, and the consensus target is $50.53. Shares closed Wednesday a $31.83.

Schlumberger

This top oil services company is a top large cap pick for more conservative accounts. Schlumberger Ltd. (NYSE: SLB) is a supplier of technology, integrated project management and information solutions to the international oil and gas exploration and production industry. The company remains the largest oilfield services company in the world, with far-reaching operations all around the globe, and it could be poised for years of solid growth despite the huge turn down in oil pricing.

The company operates in the oilfield service markets through three groups. The Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. The Drilling Group consists of the principal technologies involved in the drilling and positioning of oil and gas wells, and the Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs.

Shareholders receive a 3.07% dividend. The RBC price objective of $103 is well above the posted consensus target at $87.92. The stock ended Wednesday at $65.25 a share.

Extraction Oil and Gas

The RBC team is very positive on this smaller cap company. Extraction Oil and Gas LLC (NYSE: XOG) is focused on the acquisition, development and production of oil, natural gas and NGL reserves in the Rocky Mountains, primarily in the Wattenberg Field of the Denver-Julesburg Basin of Colorado.

The company offers its exploration and production processes in various steps, such as seismic, site preparation, drilling the well, completing the well, monitoring the well and reclaiming the site. The company utilizes sound walls to mute or redirect noise caused by its operations. It uses an electric rig to manage its drilling operations, and it uses vapor recovery units to capture emissions from storage facilities. Lastly, Extraction uses lease automatic custody transfer units to collect oil from tanks in a closed-loop system that manages air emissions associated with the oil gathering and transportation process.

RBC has set its price target at $25. The consensus target is $24.60. The stock closed Wednesday at $13.32.

The RBC stock picks offer a little of something for everyone: exploration and production, master limited partnerships and oil field services. All these outstanding companies have been hit hard and are offering investors the best entry points in over a year. With second-quarter earnings right around the corner, it may make sense to buy partial positions and see how the results are.