Energy
13 Top Oil & Gas Stock Picks for 2018 as Oil Challenges $60
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The end of 2017 and the start of 2018 are heralding several critical issues for investors. The bull market is now nearly nine years old, and at the same time oil has come back to challenge the $60 per barrel mark. Energy has lagged as an investment for quite some now, but a recent resurgence of interest from investors has been rather powerful and sets the stage for energy to be relevant again. Now the question is how to position portfolios for 2018 and beyond.
24/7 Wall St. reviews dozens of daily analyst research reports, and this turns into hundreds of reports each week. In the second half of December there have been many Wall Street strategists making big bold projections for stocks in the year ahead. That is after the Dow Jones Industrial Average is up about 25% and the S&P 500 is up about 20% so far in 2017. What has been hard to ignore is that Wall Street is now calling for energy stocks to return to being a positive factor ahead rather than a drag as was seen throughout much of 2017.
We have tracked several macro-calls around oil in the past couple of weeks of 2017, and we have specifically tracked what are now 13 analyst calls on individual energy stocks.
Credit Suisse has made some major changes to its oil and gas coverage universe. The firm initiated coverage on 38 exploration and production (E&P) companies, as well as the major oil producers. It turns out that the firm has issued more neutral and cautious calls combined than it has Outperform ratings. Still, the firm sees major oil producers looking expensive and E&P valuations having contracted. They reflect a 10% discount to the firm’s own mid-cycle oil price forecast of $57 per barrel in oil.
Jefferies recently set new oil price targets. It is now calling for Brent to average $63 per barrel and West Texas Intermediate (WTI) crude to average $58.75 per barrel in 2018. Those figures are now also set at $60 for Brent and $58 for WTI in 2019, and Henry Hub natural gas prices of $3.25 per million British Thermal Units in 2018 and beyond. The longer-term forecast for oil remains $65.
A new RBC research report raised the firm’s oil price estimates across the board for the next two years. WTI is seen averaging $54 a barrel in 2018 and $56 in 2019, but oil is now above that. RBC’s longer-term price estimate for oil is set at $65.
Also, Kayne Anderson has just announced that the Tax Cut and Jobs Act had a positive impact on its KYN MLP closed-end fund. The firm said the net asset value per share was $18.57, up $1.84 (some 11.0%) as a result of the tax reform enactment. Prior to the bill becoming law, the deferred tax liability was based on the federal tax rate of 35% and the cut to 21% significantly reduces its deferred tax liability and resulting in the increase to net asset value.
As a reminder, most analyst calls in general tend to call for upside of roughly 8% in large cap stocks at this stage of the bull market. Amazingly, some stocks with Buy and Outperform ratings are coming with just 5% upside to their price targets. Some of these calls imply that investors may expect total returns handily higher than that 8% mark.
Consensus analyst data are from Thomson Reuters, and details have been offered on each call. There have been more than just 13 energy stock calls from analysts, but these were the ones that stood out the most for larger upside calls in 2018.
Anadarko Petroleum Corp. (NYSE: APC) was started as Outperform and assigned a $61 price target by Credit Suisse in mid-December. That target was up 29% from the $47.32 share price ahead of the call, but Anadarko shares were last seen back up at $54.00. The consensus analyst target price is currently closer to $62.50, and Credit Suisse’s so-called blue sky scenario for Anadarko is all the way up at $81. The shares have a 52-week trading range of $39.96 to $72.32, making the targets seem less than overly bullish.
According to Credit Suisse, Anadarko’s longer-term oil production growth is near the peer average. Still, its material free cash flow generation should enable it to generate superior cash flow growth.
Anadarko shares were last seen down 22% so far in 2017.
Cowen sees several benefits for Chevron now. Its lower earnings case should have diminished importance next year due to “moving parts around tax reform” and higher depreciation expense required to start up its liquefied natural gas (LNG) assets in Australia. Cowen also sees 2018 free cash flow at near record levels of $14.5 billion, versus about $6.4 billion in 2017. And the firm talked up its Permian metrics as accelerating.
Chevron shares were most recently trading around $126, in a 52-week range of $102.55 to $126.14. This call from Cowen lifted the consensus price target to over $128.50 from about $124.50, and just 90 days earlier the consensus analyst target price was $115.77. Chevron shares were up 7% year to date in 2017.
CNX Resources Corp. (NYSE: CNX), the natural gas play that was under CONSOL (coal), was started as Outperform and assigned a $22 price target at Robert W. Baird on December 19. The shares were up 1.4% at $14.40 after the call, still implying just over 50% upside in the post-spin operation. More recently, the shares were trading at $14.82, and the 52-week trading range was listed as $11.29 to $16.47. Back on December 1, S&P raised its corporate credit rating to BB− from B+ based on exiting the coal overhang.
One issue that may spur more analyst calls into the start of 2018 is that CNX Resources has more recently announced the intention to rebrand Cone Midstream Partners to CNX Midstream Partners. CNX has a consensus analyst target price that is $17.60, but that target has come down $2 in the past 30 to 45 days.
CNX shares were last seen down 2% so far in 2017.
Continental Resources Inc. (NYSE: CLR) was raised to Outperform from Neutral at Macquarie on December 14, and on December 12 Credit Suisse started it with an Outperform rating and assigned a $57 price target. On December 21, Barclays raised its target price to $53 from $46. As of the end of 2016, Continental’s estimated proved reserves were 1.275 billion barrels of oil equivalent (MMBoe) with estimated proved developed reserves of 519 MMBoe. Its market cap is about $20 billion.
Continental Resources is a key player in the “Rockin’ the Bakken” theme. Trading at $53.41 now, the stock has a consensus target price of $51.73, and that target is up $7 in roughly the past 90 days. The 52-week range for this energy giant is $29.08 to $53.57, and its shares have risen about 10% just since December 20.
Continental Resources shares were last seen 3.6% so far in 2017.
Energy Transfer Partners L.P. (NYSE: ETP) merged with Sunoco Logistics Partners last year and the entity engages in the natural gas midstream and intrastate transportation and storage businesses in the United States. This more than $20 billion master limited partnership (MLP) owns and operates 7,500 miles of natural gas transportation pipelines and three natural gas storage facilities in Texas, and its Interstate Transportation and Storage segment provides natural gas transportation and storage services with approximately 12,300 miles of interstate natural gas pipelines. It also has interests in various natural gas pipelines.
Energy Transfer Partners was featured around Christmas as one of five top MLP picks by RBC, with a $22 price target that is lower than consensus. There is also a 12% distribution yield-equivalent to consider here. The consensus target price was last seen at $24.70, but the consensus target was $26.80 just 90 days earlier. The unit performance showed a 25% drop so far in 2017. RBC recently noted:
The company has under-performed on growth project challenges and equity overhang. We believe these headwinds have mostly subsided and Energy Transfer is on path for cash flow growth as growth projects including DAPL, Rover, ME2/2X and Revolution come online and/or continue to ramp. As cash flow increases, we expect natural de-leveraging and a path to simplification.
Fairmount Santrol Holdings Inc. (NYSE: FMSA) was raised to Buy from Neutral at Guggenheim with a $7.30 price target on December 18. Its shares were at $5.18 ahead of the call, and they more recently traded at $5.36. This fracking-sand player has a volatile 52-week range of $2.46 to $13.12. Guggenheim’s target is handily above the consensus target price of almost $6 but is also less than the current street-high target of $8.
Fairmont Santrol has lost half of its value in 2017.
Halliburton Co. (NYSE: HAL) may still be down over 20% from the highs of last January but it was among five top oil services picks at Deutsche Bank right before the Christmas break. Halliburton is of course one of the world’s largest providers of products and services to the energy industry, and it operates almost anywhere it is called to go. Analysts feel that Halliburton will be a huge benefactor as the fracking market has tightened significantly and prices are now higher. The company posted solid third-quarter results that topped analysts’ estimates, driven by better pricing and increased activity in North America.
Deutsche Bank has a $54 price target on Halliburton that is higher than the consensus target of $53.16. The shares were trading at $47.30 when featured, but more recently the stock went up to $48.77. Shareholders also receive a 1.52% dividend to consider in the total return forecasting.
Halliburton shares were last seen down almost 10% so far in 2017.
Gulfport Energy Corp. (NASDAQ: GPOR) was raised to Overweight from Neutral at JPMorgan on December 15. The consensus price target was $19.23 at the time, but that consensus is now closer to $19.10. Gulfport shares are now also trading at $12.75, with a 52-week range of $10.90 to $23.11. More recently than the JPMorgan call, S&P raised its corporate credit rating on December 21 to BB− from B+ in a credit analysis.
Gulfport Energy shares were last seen down 40% so far in 2017.
Noble Energy Inc. (NYSE: NBL) was raised to Buy from Hold with a $32 price target at Jefferies on December 20. The shares closed up 3.6% at $27.23 ahead of the call, and they more recently traded at $29.50. That compares to a 52-week range of $22.99 to $40.89, and this call from Jefferies is actually almost $4 lower than the consensus price target of $36.00. On December 21, Barclays raised Noble’s price target to $32 from $31 as well.
Noble Energy shares were last seen down 22% so far in 2017.
Phillips 66 Partners L.P. (NYSE: PSXP) was raised to Buy from Neutral with a $60 price target at Goldman Sachs on December 18. The units were last seen trading at $51.23, and the 5% yield would represent a total return of over 22% if the firm is correct. The 52-week trading range is $44.40 to $58.00, and the consensus price target is $59.43.
Phillips 66 Partners units shares have risen more than 7% so far in 2017.
ProPetro Holding Corp. (NYSE: PUMP) was started with a Buy rating and assigned a $27 price target at SunTrust Robinson Humphrey on December 20. This compares with a $19.36 prior closing price, and the shares were up 2.5% at $19.85 after the call. More recently, ProPetro shares were up at $20.50. The stock had a consensus target price of $21.00 ahead of the call, and its consensus target is now $21.91. The 52-week range now also is higher at $10.84 to $20.59.
This fracking and complementary oil services outfit targets the Permian, and its market cap is a mere $1.7 billion. Without a full year of data, its shares screened as being up 41% in 2017.
RSP Permian Inc. (NYSE: RSPP) is an independent oil and natural gas company focused on the Permian Basin. The vast majority of the company’s acreage is located on large, contiguous acreage blocks in the core of the Midland Basin. RBC added RSP Permian to the RBC Global Energy Best Ideas list this fall, and it was recently noted as being one of RBC’s four top picks for higher oil in 2018.
What makes RSP Permian look interesting beyond just one analyst call is that it has landed multiple analyst upgrades from top Wall Street companies over the past year. Some even believe RSP Permian could be a potential takeover candidate. The RBC price target is $47, and Baird and Stifel both recently raised their targets to $46. The consensus target is $46.29. Shares were at $39.82 around the RBC inclusion, but the stock was last seen up at $40.85. Its shares are down over 8% so far in 2017. The RBC report noted this:
The company trades in line (2019 Enterprise Value/EBITDA) with Permian peers but has one of the best debt-adjusted production growth outlooks among peers. Cash margins per BOE are also amongst the best in the industry. There is visibility for 30%+ growth in 2018 and 2019 at cash flow levels assuming $50-55/bbl. We expect management to remain disciplined, as it has demonstrated before, if oil prices weaken and maintain a cash flow neutral bias. We see further upside to our valuation through improving capital efficiency in the Delaware and expanding resource potential in both its operating areas.
Southwest Gas Holdings Inc. (NYSE: SWX) was raised to Buy from Neutral at UBS on December 19, and the price target was raised to $97 from $85 in that call. The prior closing price was $79.67, and the call implied upside of almost 24% when the 2.5% dividend yield is accounted for. That being said, the shares were up 3.8% at $82.75 shortly after the call but have since mellowed down to $80.00. The pre-call consensus target was $79.00 but is now above $82.
Southwest Gas has a market cap nearing $4 billion and a 52-week range of $71.51 to $86.87. Its shares are up over 4% so far in 2017.
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