Energy
Stifel Likes 5 Top Energy Stocks as Solid Q3 Earnings Start to Roll In
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The price of oil has bounced around quite a bit over the past 90 days, generally staying between $65 and $74 a barrel. The good thing for most energy exploration and production companies is that they make solid money at those levels, and the benchmark price doesn’t weigh too hard on the economy. With earnings for many of the top companies right around the corner, and the stock prices much lower than earlier this year, now may be a good time to add some shares.
In a recent report, Stifel remains reasonably positive on the prospects for the companies in its energy coverage oil and gas production universe. The report said this:
We expect investors to maintain a relatively positive view on the sector. Over the last two months, we have held meetings and conference calls with ~80 investors across the U.S. The investor base was composed of dedicated mutual funds (~25%), generalist (~40%) and dedicated hedge funds (~35%). Investor sentiment was decidedly positive on crude prices and broadly constructive on energy stocks with concerns regarding capital discipline and timing being the distinguishing factors between the two. In general, investors were broadly disappointed with the sector’s capital spending plans announced during second quarter 2018 earnings.
Here we focus on five of the larger cap companies covered by Stifel. All are rated Buy, and two already have reported outstanding results, which bodes well for the other three, which are set to report next week.
Cimarex Energy
This is a top play for investors looking to the Permian Basin. Cimarex Energy Co. (NYSE: XEC) is an independent exploration and production company. Its primary activities are in the Mid-Continent and Permian Basin areas of the United States.
The company is focused on increasing shareholder value through strategies linked to generating attractive economic returns on capital employed and profitable growth in per-share reserves, production and cash flow. It intends to profitably grow reserves and production through a balanced mix of exploration, exploitation and acquisitions.
Cimarex has a diversified base of high-quality production and attractive drilling opportunities. It should be noted that hedge funds have initiated sizable new positions in the company over the past year, and like its brethren in the Permian, many consider the company a very solid takeover target.
Investors receive just a 0.80% dividend. The Stifel price target for the stock is a gigantic $179. The Wall Street consensus target is $122.84, and shares closed Wednesday at $79.47. The company is expected to report on November 6.
Concho Resources
This year the company bought RSP Permian for $9.5 billion, and most on Wall Street liked the deal as a good bolt-on acquisition. 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.
The company reported strong quarterly earnings on Tuesday but still has a lot of upside to posted price targets. Stifel has a $197 price target, and the consensus target is $187.12. Shares closed Wednesday at $139.09.
24/7 Wall St.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.
Many on Wall Street feel that the company’s investment thesis is virtually unmatched. Investors get core Permian-like acreage at a non-Permian valuation. Of greatest importance, Continental is one of few diversified large-cap stocks that offers investors exposure to low-cost oil outside of the Permian. With current capacity and distribution issues in the Permian, this is another solid reason to own shares.
Driven by significantly better results when utilizing the high-intensity completions, and having an unhedged 2018 and 2019 oil production profile, Continental Resources is estimated to generate a 5.4% to 5.6% free cash flow yield at the strip. Toss in an expansive low-cost oily resource inventory that could provide decades of drilling locations with a reasonable valuation, and the shares are compelling.
Continental reported record third-quarter production levels as earnings topped analysts’ expectations. The $77 Stifel price target compares with the $76.68 consensus target. Shares closed Wednesday at $52.68.
Diamondback Energy
This is a top Permian Basin play for more aggressive accounts. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.
Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow, but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.
Stifel has set its price target at $199. The consensus target is $171.36, and shares closed Wednesday at $112.36. The company is due to report results on November 6.
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 a top player in the Permian as it expects to deliver solid production growth in 2018 and beyond.
The company’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, many analysts feel that Pioneer offers the second highest multiple contraction among the large-cap Permian pure-play peers, as well as the highest free-cash-flow yield.
Investors receive a 0.05% dividend. The Stifel price target is a stunning $346, while the consensus figure is just $246.37. Pioneer closed on Wednesday at $147.27 a share. It also expected to report results on November 6.
These five top companies are all trading well below 52-week highs and offer outstanding entry points for investors looking to add or increase their energy holdings. In addition, these companies are industry leaders, which offers a degree of safety for investors as compared with smaller cap players.
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