The laws of supply and demand have been the guiding force for pricing since trade began, and if any commodity and sector is being influenced by those laws now it is energy. Despite OPEC and Russia agreeing to raise production, and the U.S. president imploring Saudi Arabia to increase it as well, demand has increased on a worldwide basis, and reserves are not being filled as quickly as in the past.
A new RBC research report raises the firm’s benchmark pricing for oil. West Texas Intermediate estimates for 2018 and 2019 go from $63 and $65 to $68 and $76, respectively. The Brent forecast goes from $67 and $69 to $76 and $86, respectively, for the same period.
The analysts noted this concerning the increase in free cash flow in their report:
Free-cash-flow generation of $9 billion in 2018 could be dwarfed by $20 billion in 2019. We think Permian infrastructure limitations and capital discipline limit spending through most of 2019. Companies may increasingly be challenged by investors on best ways to deploy FCF. We expect large caps to focus on shareholder returns with stock buybacks a priority, but plenty of room for higher sustainable dividends exists. Large caps now yield around 1% and that could improve by 50%.
These six companies are top stock picks at RBC and all are rated Outperform.
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Anadarko Petroleum
This top company’s stock is still down a stunning 30% from highs printed in 2014, the last time oil traded at $70. 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. The other segments are Midstream and Marketing.
The company reported impressive first-quarter results, helped by lower depreciation, depletion and amortization and strong oil production that topped guidance, led by the U.S. onshore. Half of Permian production is exposed to basis in 2018, but Enterprise and Cactus 2 should leave the company fully covered by 2019.
With oil prices at current levels, many on Wall Street believe Anadarko can reload share buybacks after the program concludes.
Anadarko shareholders are paid a 1.33% dividend. The RBC price target was recently raised to $88 from $79. The Wall Street consensus price objective is $81.76, and the shares closed Monday at $75.18.
Concho Resources
This company recently bought RSP Permian for $9.5 billion, and most on Wall Street like the deal. 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.
It 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.
RBC boosted its price target from $190 to $200, and the consensus target is $180.55. The stock closed Monday at $145.41 a share.
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Callon Petroleum
RBC currently feels comfortable about this small-cap stock. Callon Petroleum Co. (NYSE: CPE) is an independent oil and natural gas company engaged in the exploration, development, acquisition and production of oil and natural gas properties. The company focuses on the acquisition and development of unconventional oil and natural gas reserves in the Permian Basin.
The company’s drilling activity focuses on the horizontal development of various prospective intervals in the Midland Basin, including multiple levels of the Wolfcamp formation and the Lower Spraberry shale. Callon made a huge $570 million acquisition of 29,000 net acres in May that more than doubled its Delaware Basin footprint.
The $15 RBC price target compares with a $16.68 consensus target. The stock closed trading on Monday at $11.29.
Centennial Resource Development
This off-the-radar stock could have solid upside potential. Centennial Resource Development Inc. (NASDAQ: CDEV) is a pure play Permian oil and gas producer. The company holds 87.9 thousand net acres across the Delaware Basin, with its largest position in Reeves and Pecos, Texas, (76.1 thousand net acres) and its recently acquired position in Lea County, New Mexico, (11.9 thousand net acres). The company’s legacy position, which it was held since the time of its initial public offering (IPO) in late 2016 covers 42.5 thousand net acres in Reeves, Pecos and Ward counties.
First-quarter net income increased 116% to $66.1 million, or $0.25 per diluted share, compared to the fourth quarter 2017. For the quarter, average daily crude oil production increased 15% from the prior quarter and 201% year over year.
The RBC price target was raised to $28 from $26, while the consensus target was last seen at $25.82. The stock closed trading on Monday at $18.47.
Matador
This company has been mentioned recently as a potential takeover target. Matador Resources Co. (NYSE: MTDR) is an independent energy company that engages in the exploration, development, production and acquisition of oil and natural gas resources in the United States.
The company primarily holds interests in the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. It also operates the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas.
Since its IPO, Matador has grown its Permian acreage by more than tenfold as a result of acquisitions, and it has 2,151 net horizontal locations across multiple prospective zones.
The $39 RBC price target was raised to $42. The posted consensus target is $37.44, and the shares closed Monday at $32.52.
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Oasis Petroleum
This smaller independent could be an outstanding play for more aggressive accounts. Oasis Petroleum Inc. (NYSE: OAS) is an independent exploration and production company that focuses on the acquisition and development of unconventional oil and natural gas resources in the North Dakota and Montana regions of the Williston Basin. Its principal projects are located in West Williston and East Nesson.
The company expanded its presence when it closed on a Permian Basin acquisition on February 14, 2018, adding an average of approximately 3.6 thousand barrels of oil equivalents per day of production and approximately 22,000 net undeveloped acres. The company bought the acreage in the Delaware Basin from privately held Forge Energy for about $946 million.
RBC raised its $14 price target to $15. The consensus figure is $14.64, and the shares closed Monday at $13.34.
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These are two large cap plays and four small and mid-cap favorites from the energy team at RBC. All these picks are good for growth accounts with a degree of risk tolerance looking for more energy exposure.
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