Investors looking for oil stocks that can flourish amid forecast for flat oil prices in 2019 should consider buying shares of companies including energy producers Pioneer Natural Resources (PXD) and Cimarex Energy Co. (XEC), as well as energy service companies Keane Group Inc. (FRAC) and ProPetro Holding Corp. (PUMP), according to a recent research report from Stifel. Analysts view all four of these companies as positioned for major upside. Stifel prefers larger, better-capitalized oil-and-gas companies, like exploration and production stocks Pioneer and Cimarex, viewed as better fit to outperform in a weaker energy market. Meanwhile, companies like Keane and ProPetro, were highlighted as strong, “U.S. completion leveraged names,” given they do the final work involved in bringing new oil wells into production, per Barron’s.
4 Oil Stocks That Can Thrive
· Pioneer Natural Resources (PXD)
· Cimarex Energy Co. (XEC)
· Keane Group Inc. (FRAC)
· ProPetro Holding Corp. (PUMP)
After a volatile year for oil in 2018, wherein the price of the commodity fell almost 50% from $77 per barrel to $42 per barrel from October to December, this year looks like it will be a quieter one for the industry. The Energy Select Sector SPDR ETF (XLE) has increased 11.2% year-to-date (YTD) compared to the S&P 500’s 8.1% gain over the same period.
While flat or falling oil prices are typically viewed as unattractive for companies like miners and energy producers, given their stock prices are normally correlated to commodity prices, Stifel says a handful of companies are exceptions.
Oil and Gas Producers
Pioneer and Cimarex both trade at a 50% discount to their historical valuations and tout low financial leverage, per Stifel. The broker expects shares of Pioneer to more than double from their current price to reach a 12-month target at $303. As for Cimarex, Stifel’s $174 price target implies a more than 140% upside.
Stifel analyst Stephen Gengaro sees an opportunity for investors to capitalize on a growing number of wells that are “drilled but uncompleted,” called DUCs. This phenomenon is good for providers of pressure pumping services, such as ProPetro and Keane, which he expects to rise a respective 45% and 64% over 12 months.
A new regulation called IMO 2020 could also impact the industry, notes Stifel. Analysts indicate that investors should be aware of the rule which reduces the level of sulfur allowable in the bunker fuel that powers ships, effective next year. Increased demand for lower-sulfur bunker, a value add product, would benefit U.S.-based refiners.
The Big Five
The world’s five largest publicly traded oil companies are also doing well even in light of weak oil prices, per Bloomberg. Exonn Mobil Corp. (XOM), Royal Dutch Shell (RDS.A), Chevron Corp. (CVX), Total SA (TOT) and BP plc (BP) all exceeded the consensus estimate for earnings in the first quarter, indicating that a new focus on lowest-cost barrels, which can turn profits in periods of surging market volatility, has proved a successful tactic.
“People are waking up to the fact that these companies can operate with a low oil price,” stated JPMorgan Chase & Co analyst Christyan Malek in an interview with Bloomberg. “We continue to stay bullish on the group.”
The JPM analyst highlighted several upside drivers for oil players, including high levels of cash on hand, and the highest level of the Big Five’s combined cash flow in at least eight years. Less of an importance placed on oil reserves has also helped out oil companies, proving that they can do less with more. Other positive tailwinds include an active de-leveraging in the industry and an improving return on capital.
Stifel’s oil stock picks demonstrate the fact that the discerning investor may still find strong under the radar picks, even in an industry with weak macro trends. Analysts warn that if investors wait out for oil prices to rise before investing in the industry, they may miss out on some of the sector's value.