Just over a year ago, oil futures were trading negatively and the energy sector looked all but wiped out. What a difference a year makes. With West Texas Intermediate crude slipping back below the key $70 a barrel level, the question for investors wanting to own energy stocks is should they step in and buy shares now or wait.
With OPEC settling their issues this past weekend and agreeing on a 400,000 barrel per day production increase, some say now is not the time. However, others, including the energy team at Stifel, are citing the return to pre-pandemic consumption levels, much better discipline from the top exploration and production companies and the fact that the overall market is still very tight.
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In a new research report, Stifel remains optimistic about the energy sector and favors upstream stocks that can return 100% of their enterprise value within 10 years, given the uncertain medium-to-long-term fundamentals for oil and gas. The analysts said this when discussing the sector’s prospects:
Over the last month, we have held meetings and calls with ~40 investors. The investor base was composed of dedicated mutual funds (~25%), generalist (~50%) and dedicated hedge funds (~25%). Throughout this period, investor interest in the Energy sector has faded as commodity prices have weakened and operating/regulatory risks have moderated. While the sector remains attractively priced versus the market and the fundamentals drivers (demand recovery to 2019 levels, E&Ps remaining disciplined, continued sector consolidation, sustained reflation) for continued outperformance remain in place, we expect investors to maintain a neutral stance towards the sector until the global demand outlook for oil further firms (post COVID-19). In our view, a demand recovery to ~100 mmbopd in the second half of 2021 would mitigate oversupply concerns (Iran, U.S., etc.) for 2022.
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We screened the upstream stocks the analysts prefer and found five rated Buy that look like solid choices for growth investors with a degree of risk tolerance. While all five are rated Buy, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
APA
This company was long considered an industry leader when it was known as Apache, and the stock is perhaps offering one of the best entry points in the sector. APA Corp. (NYSE: APA | APA Price Prediction) explores for and produces oil and gas properties. It has operations in the United States, Egypt and the United Kingdom, as well as has exploration activities offshore Suriname. It also operates gathering, processing and transmission assets in West Texas, as well as holds ownership in four Permian-to-Gulf Coast pipelines.
The company is one of the largest U.S. exploration and production (E&P) companies with 2.3 billion barrels of oil equivalent of proven reserves (63% liquids). It is an acquirer, exploiter and explorer, a fiscally conservative company that has grown its reserves and production consistently via acquisitions and organic projects.
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In May, APA posted earnings of $0.91 per share, which was a strong beat over the Wall Street expectations, with an impressive $500 million of free cash flow in the first quarter. At the current strip prices, the fiscal year cash flow could come in at $1.8 billion. International production is back-end loaded. The massive Suriname discovery, along with partner Total, back in January is literally in the stock for free.
The Stifel price target for the shares is $33, while the Wall Street consensus target is just $28.19. The last APA stock trade for Monday came in at $17.21, which was down almost 4% on the day.
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Devon Energy
This stock may be offering one of the best value propositions among the Stifel ideas. Devon Energy Corp. (NYSE: DVN) is an independent energy company that primarily engages in the exploration, development and production of oil, natural gas and natural gas liquids (NGLs) in the United States and Canada. It operates approximately 19,000 wells.
The company also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensate through its natural gas pipelines, plants and treatment facilities.
Production is weighted toward crude oil while growth opportunities are liquids focused, anchored by the Delaware Basin, SCOOP/STACK, Eagle Ford Shale, Canadian Oil Sands, and the Barnett. Devon also owns equity in the publicly traded midstream master limited partnership EnLink.
Stifel has a $45 price target, and the consensus target is $36.17. Devon Energy stock retreated over 3% on Monday to close at $24.93.
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EOG Resources
This leading energy firm shows up well on many Wall Street screens. 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 stock was hit hard recently and is offering an outstanding entry point for investors looking for quality ideas in the sector. EOG has secured four years of drilling permits, while retaining flexibility to reallocate resources to other parts of the portfolio and off federal property. EOG has 3000 locations not on federal lands, which most on Wall Street expect to expand through its exploration.
EOG Resources stock investors receive a 2.35% dividend. The whopping $114 Stifel price target is well above the $97.53 consensus target. The stock closed on Monday at $70.34, after pulling back almost 5%.
Northern Oil & Gas
This is an outstanding idea for investors looking for a smaller cap play with far fewer capital expenditures. Northern Oil & Gas Inc. (NYSE: NOG) is an independent energy company engaged in the acquisition, exploration, exploitation, development and production of crude oil and natural gas properties in the United States.
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The company primarily holds interests in the Bakken and Three Forks formations in the Williston Basin of North Dakota and Montana. As of December 31, 2020, it owned working interests in 6,640 gross producing wells and it had proved reserves of 122,632 million barrels of oil equivalent.
The company announced earlier this summer that it was expanding its reach by entering into three definitive agreements to acquire non-operated interests across approximately 2,900 net acres located in the heart of Reeves County, Texas, and Lea and Eddy Counties, New Mexico, for a combined purchase price of $102.2 million.
Stifel has set a $23 price target. The consensus target is slightly higher at $23.88, and Monday’s closing share price was $15.61.
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Pioneer Natural Resources
Many Wall Street analysts love this stock as 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 in 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 2021 and beyond.
As of December 31, 2020, the company had proved undeveloped reserves and proved and developed non-producing reserves of 31 million barrels of oil, 17 million barrels of NGLs and 88 billion cubic feet of gas, and it owned interests in 11 gas-processing plants.
Investors receive just a 0.38% dividend. The Stifel price target is $197. The consensus target is $208.27, and Pioneer Natural Resources stock closed on Monday at $16.55, after a 3% decline on the day.
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These are five outstanding ideas for investors looking at energy stocks now. It is very possible as the market absorbs the OPEC increase in production and the general overbought conditions in the major indexes that these stocks could trade flat to lower in the near term. It may make sense to perhaps buy a partial position in front of what should be some very solid earnings reports.
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