With the fourth-quarter earnings season starting to wind down for many top S&P 500 companies, the energy sector is about to release numbers for the fourth quarter. Many on Wall Street are not only excited to see the results but are very anxious for guidance for the first quarter and the rest of 2018. One thing is for sure, U.S. production will continue to ramp up, and if prices can hold above $60 for West Texas Intermediate, the energy sector could be poised for a much better 2018.

In a new research report, Stifel is cautiously optimistic, not only for the quarter but for the balance of 2018. The report explains why:

In preparation for the upcoming Q417 earnings season, we are updating our commodity estimates to reflect strip prices through 2020 and revising our production and capital forecasts to reflect recent discussions with management. In short, we are increasing our aggregate 2018 activity levels, production forecast, cash flow estimates and capital expenditures by 3%, 1%, 10%, and 9%, respectively. For fourth quarter earnings, we believe investors are keenly focused on 2018 industry activity levels, inflationary pressures given the recent increase in commodity prices, project execution in the growth basins and year-end resource updates.

The analysts raised price targets on the companies in their research universe. We screened their preferred stocks, which are biased to the Anadarko and Permian basins, for five that look like they have solid upside potential.

Continental Resources

This company has very large exposure to crude oil. Continental Resources Inc. (NYSE: CLR) is primarily a producer of onshore U.S. oil and has positioned itself in two growing hydrocarbon discoveries in the country: 1) the Bakken oil play in Montana and North Dakota, and 2) the SCOOP/STACK in Oklahoma, giving the company good growth opportunities for years to come.

The analysts are very positive on this company and noted this in their report:

Continental Resources’ investment thesis is unmatched, in our view. Investors get core Permian-like acreage at a non-Permian valuation. Of greatest importance, Continental is one of few stocks within our diversified large-cap coverage that offers investors exposure to low cost oil outside of the Permian. We anticipate growing pains in the Permian and believe diversification is important in the high-quality peer class.

The Stifel price target was raised to $71 from $70. The Wall Street consensus target is $59, and shares closed Tuesday at $54.68, down over 4% on the day.

Concho Resources

This Wall Street favorite is one of the top energy plays in the Permian Basin. 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, where it owns 600,000 net acres. The company has 624 million barrels of oil equivalent of proven reserves, of which 57% is classified proved developed and 59% is oil.

The analysts like the diversification the company brings:

Concho Resources offers investors a unique combination of investment themes, including valuation, rate-of-change, and resource expansion themes. The company is the largest acreage holder of the publicly traded Permian large-caps and provides investors peer-leading exposure to three of the most impactful catalysts across the Delaware Basin including the Wolfcamp XY, Wolfcamp D and Bone Spring Shale.

Stifel boosted its price target to $195 from $175. The consensus target is $169.54, and shares closed Tuesday at $157.36.

Parsley Energy

This is smaller capitalization stock for aggressive investors to consider. 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 of 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 initial public offering and has over 7,900 horizontal locations across multiple prospective zones.

Stifel likes the Permian exposure the company has and said this:

The company is a catalyst rich, Permian Basin pure play. Parsley Energy has some of the strongest wells in the basin, generating returns that are among the best in the industry. Parsley is also rapidly de-risking its drilling inventory and is well-positioned to continue to beat its strong growth projections, in our view

The $46 Stifel price target was raised to $49, which compares with a consensus target of $39.70. The stock closed trading Tuesday at $24.07, after retreating more than 14%.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play. (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 a top player in the Permian as it expects to deliver solid production growth in 2018 and beyond.

Like many on Wall Street, Stifel is very bullish on the company:

In our view, Pioneer offers a rare valuation and growth investment opportunity. The stock’s unmatched depth of low cost inventory and balance sheet allow it to compete favorably in both mild and moderate recovery case scenarios. In addition to asset and financial strength, Pioneer offers the second highest multiple contraction among the large-cap Permian pure-play peers. and the highest free-cash-flow yield.

Pioneer investors receive just a 0.05% dividend. Stifel raised its $253 price target to $260. The consensus price figure is $201.25. Shares closed trading on Tuesday at $182.66.

WPX Energy

This smaller capitalization company with solid upside potential is another top Permian Basin play. WPX Energy (NYSE: WPX) is an independent oil and natural gas exploration and production company that engages in the exploitation and development of unconventional properties in the United States. Its principal areas of operation include the Permian Basin in Texas, the Williston Basin in North Dakota and the San Juan Basin in New Mexico and Colorado.

WPX is a premier Permian-levered operator with sector-leading debt-adjusted cash flow growth supported by strong execution in the core Delaware, all while trading at a Williston Basin valuations primarily due to its relatively high financial leverage. Stifel is very positive and explained why:

In our view, WPX offers one of the most compelling recovery investment opportunities. We are bullish on oil fundamentals due to the implied call on U.S. production in 2019 and 2020. WPX offers differentiated upside in a recovery case based on its asset quality/productivity and debt leverage. The company is the largest acreage holder of the publicly-traded mid-caps and may have pound-for-pound the best position in the Delaware Basin.

The Stifel price target went from $21 to $24, and the consensus price objective is $17.50. The stock closed Tuesday at $14.86.

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These five top stocks to buy all make good sense for investors looking to add energy, especially companies with Permian Basin exposure. The recent selling is offering some timely entry points for investors with a long-term horizon.

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