Even though oil has stayed above the critical $50 a barrel level, the energy sector has been a big disappointment this year. While the S&P 500 is up almost 20% this year, the energy sector, as measured by the Energy Select SPDR ETF (NYSE: XLE), is essentially flat. This comes despite the fact the sector has seen some price premium moved in as Saudi Arabia had production capabilities bombed and Iran recently had a tanker attacked.

So what does this mean for investors? With the U.S. shale and production story slowing, and many companies now focused on free cash flow, what is the best move for investors who see value but remain cautious?

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The analysts at RBC are very positive on four large-cap exploration and production energy stocks, and with good reason. With the shift toward free cash flow as a major metric of interest, these all score well in that category. The RBC report noted this with earnings on the horizon:

During the coming week or two, we will get a better taste for the market’s appetite for US E&Ps with most of our coverage scheduled to report. In our third quarter 2019 earnings preview we highlighted that investors will be focused on capital spending plans and activity in 2020 with some companies providing initial budgets for next year. Operators appear keenly attuned to investor preference for shareholder return over growth with share buybacks as the preferred mechanism. Notably, we anticipate that spending should taper further with most operators continuing to reduce rig and frac crew counts in year-end 2019 before modestly picking back up in 2020.

The four Outperform-rated stocks are some of the leading companies in the industry, and their shares all have at least 50% upside to RBC price target.

Concho Resources

Last year, this company bought RSP Permian for $9.5 billion, and most on Wall Street loved the deal. Concho Resources Inc. (NYSE: CXO) is an independent 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.

Concho Resources offers investors a small 0.76% dividend. The RBC price target for the shares is $104, and the Wall Street consensus target is $116.69. The stock closed trading on Friday at $65.82 per share.

Diamondback Energy

This is a top Permian Basin play for more aggressive accounts, and it could be a takeover target. 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 Energy’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 Diamondback Energy’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. It 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.

RBC has set its price target at $140, while the posted consensus target was last seen at $144.47. The shares closed Friday’s trading at $87.46 apiece.
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EOG Resources

This leading energy company is also a top pick across Wall Street. EOG Resources Inc. (NYSE: EOG) is one of the largest independent exploration and production companies operating in the United States, Canada, Trinidad, the United Kingdom and China.

The company has a big well in Loving County in the Delaware Basin. Top analysts say the well ranks as one of the best they have ever seen in the basin, and it could easily affect other companies drilling in the region. EOG’s average dollar gross per well on a yearly basis ranks third among all operators.

EOG Resources shareholders receive just a 0.95% dividend. Note that the $110 RBC price target is considerably lower than the $119.64 consensus target price for the shares. The stock ended last week’s trading at $72.48.

Marathon Oil

This is a leading integrated oil and gas company with extensive upstream operations. Marathon Oil Corp. (NYSE: MRO) operates through three segments. The North America Exploration and Production segment develops, explores for, produces and markets crude oil and condensate, natural gas liquids (NGLs) and natural gas in North America.

The International Exploration and Production segment explores for, produces and markets crude oil and condensate, NGLs and natural gas in Equatorial Guinea, Gabon, the Kurdistan Region of Iraq, Libya and the United Kingdom, as well as produces and markets products manufactured from natural gas, such as liquefied natural gas and methanol in Equatorial Guinea.

The Oil Sands Mining segment mines, extracts and transports bitumen from oil sands deposits in Alberta and Canada, and it upgrades the bitumen to produce and market synthetic crude oil and vacuum gas oil.

Marathon investors receive a 1.69% dividend. RBC has a price target of $19. The posted consensus price objective is $22.02, and the stock closed trading on Friday at $11.98 a share.

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Four outstanding companies that are not only priced right for investors looking to add energy exposure, but have huge upside to the RBC price targets. It should be noted that earnings are right around the corner, so it may make sense to buy partial positions now, and see how the results come in.

Also see which companies are the worst ocean polluters and which states are producing the most renewable energy.

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