Geopolitical concerns from Iran to Venezuela, along with worries over supply output and oil delivery disruptions, have led many investment experts to forecast higher oil prices. Several MoneyShow.com contributors highlight their favorite ideas in the energy space.

 

Andrea Kramer, Schaeffer's Investment Research

W&T Offshore (WTI) and WPX Energy (WPX) recently pulled back to key levels on the charts, suggesting it may be time to buy the dip. Both energy stocks could be ready to rally, if history is any indicator.

Analysts have yet to notice W&T Offshore. The stock has nearly quadrupled in value over the past year, rallying more than 278% since trading in the low single digits. The equity tapped a three-year high of $9.12 on July 23, but subsequently took a breather. W&T Offshore recently traded at $7.18, as traders continue to applaud the company's stronger-than-expected quarterly earnings, which were recently released.

In light of the pullback from new highs, W&T Offshore is now within one standard deviation of its 80-day moving average, after a lengthy stretch above this trendline. There have been six similar pullbacks for the stock in the past, after which the stock went on to average a one-month gain of 15.5%, per data from Schaeffer’s Senior Quantitative Analyst Rocky White.

Despite the equity's impressive rally in the past year, analysts remain wary of the penny stock. Just one out of four brokerage firms deems W&T Offshore worthy of a Buy or better rating. Should the shares once again bounce off their 80-day, a round of positive analyst initiations or upgrades could lure more buyers to the table.

A short squeeze could propel WPX Energy to new heights. The stock has enjoyed a slow burn higher over the past year, advancing more than 90%. The security just notched its highest close since 2014 thanks to a well-received earnings report, but has given back 4.3% to trade at $18.69 today.

WPX Energy is also back within one standard deviation of its 80-day moving average, after a notable stint north of the trendline. There have been eight similar dips for the energy stock in the past, and WPX Energy went on to rally 5.48%, on average, in the subsequent week, and was higher 88% of the time. Looking a month out, the shares also boast a win rate of 88%, with an average gain of nearly 8.5%.

Should the equity once again rally off this trendline, a short squeeze could add fuel to the stock’s fire. Short interest accounts for more than 26 million shares, representing nearly a week's worth of pent-up buying demand, at the stock’s average pace of trading.

 

Jim Powell, Global Changes & Opportunities

Energy stocks are coming to life again as oil prices move back above $70 a barrel – and appear likely to remain elevated. Energy producers are starting to feel more confident that the lean years are over, and they are starting to worry about having enough oil to meet rising demand. As a result, many producers are beginning to sign big ticket contracts with drilling companies to find additional reserves.

One of the biggest beneficiaries of the new exploration and development cycle is Diamond Offshore Drilling (DO). The stock is already starting to respond to its sector’s improving fortunes. From my most recent recommendation last September, Diamond is now up 59.1%, from $12.07 to $19.20. I think several years of rising profits are on the way for this well-managed company.

One oil producer that is doing very well is Suncor Energy (SU), our Canadian oil sands investment. Suncor is prospering because oil prices reached the company’s breakeven point several months ago. Now every increase goes directly to profits. Suncor’s outlook remains excellent. I continue to recommend the company. Suncor has the added attraction of having no operations in the volatile Middle East.

 

Richard Moroney, Upside Stocks

Energy stocks haven’t looked so attractive in years — and investors have taken notice. Indeed, the sector is not cheap. Energy stocks trade at 23 times estimated current-year earnings, a 9% premium to the 10-year average. Still, there are pockets of reasonably valued names, reflecting the sector’s healthy growth outlook into 2019 — per-share earnings are expected to increase 41% next year. Here are three stocks with a compelling blend of strong operating momentum and reasonable valuations.

Operating in the Permian Basin of Texas and New Mexico, Energen (EGN) is benefiting from acquisitions, improved operating efficiencies and a higher well count. The firm expects to drill nearly 130 wells this year and targets oil and natural gas production growth of 25%. Energen boasts a strong balance sheet, providing flexibility to pursue growth opportunities. Shares have rallied 29% this year, fueled partly by news that activist investor Carl Icahn has raised his ownership stake to nearly 8%.

Gulfport Energy (GPOR) offers strong operating momentum and a reasonable valuation. Operating roughly 215,000 acres in the Utica shale region of Ohio and 93,000 acres in Oklahoma, Gulfport’s ample cash flow helps drive growth and capital spending. Over the last 12 months, cash flow from operations nearly doubled to $764 million. In the June quarter, Gulfport Energy reported per-share earnings of $0.33, matching the prior year and a penny above the consensus. Revenue jumped 25% to $323 million, versus expectations of $332 million.

Newfield Exploration (NFX) operates in high growth regions in Oklahoma, North Dakota and Utah. The company, with proved reserves of roughly 680 million barrels of oil, also operates offshore China. Newfield is investing for growth. Capital spending is expected to reach $1.3 billion this year, with nearly 80% earmarked for the burgeoning Anadarko Basin. In the June quarter, adjusted per share earnings rose 119% to $0.92, outstripping the consensus of $0.82. Fueled by higher production and favorable prices, total revenue rose 69% to $679 million.

 

John Buckingham, The Prudent Speculator

Schlumberger (SLB) is the world’s largest provider of services and equipment used in drilling, evaluation, completion, production and maintenance of oil and natural gas wells. The company reported second quarter earnings of $0.43 per share (vs. $0.43 estimate) on revenue of $8.3 billion (vs. $8.4 billion estimate).

The company saw operational delays that resulted in less margin expansion than expected, but growing E&P spending amid a climbing oil price environment should result in double-digit growth in its international business next year.

Having the largest global oil services platform, a dominant international franchise, the potential benefits from recent acquisitions and the most balanced exposures of the diversified service providers, we continue to believe that Schlumberger is one of the best-positioned energy names. We concur with management that the international space is ready for an upturn. We also like the solid free cash flow and that the high quality stock that currently yields 3.0%.

 

Tom Bishop, BI Research

Solaris Oilfield Services (SOI) makes and supplies portable silo systems that can be delivered on a truck to an oil or gas well site. These silo systems each hold 1.25 million pounds of proppant (usually sand), which is used in the stimulation of almost every oil and gas well in America to increase flow rates. The silo systems have so many advantages over the existing method that the company cannot keep up with demand.

Solaris once again knocked it out of the ballpark in the second quarter reporting adjusted EPS of $0.42, vs. just $0.10 in the record year ago quarter, which is an increase of 320% over last year. This is phenomenal growth and clear validation that customer like their proppant delivery systems, in fact the company estimates its market share has increased to around 28% from 25% in the first quarter.  

Revenues were equally spectacular, soaring 252% over last year to $47.1 million (vs. estimates of $44.8 million) and increasing 31% just vs. the first quarter. The company added 24 systems in the second quarter and expects to be around 160 to 170 systems by yearend. This rate of growth that would more than justify the company’s ridiculously low P/E of 9 times this year’s earnings and 5.8 times next year’s earnings.

So I think EPS growth will continue to bubble along nicely barring a collapse in oil prices, and experts I follow think oil will go higher still. Obviously no company can keep up a 300% growth rate, but even 30% would more than justify a higher PE than single digits. 

However, at the end of the day, imagine how accretive to EPS it would be if  Halliburton (HAL) or Schlumberger (SLB) with their P/Es in the 20-30 range acquired Solaris at even 10 times next year’s earnings. That would represent nearly a double from recent levels, just to throw out a number. The stock is also a value fund’s dream, showing up on their screens all the time with a PEG of 0.2. Accordingly, for all these reasons my previous worries about the company are abated, I am off the fence and I now consider these shares a Strong Buy.

 

Todd Shaver, BullMarket

Although the energy sector has drifted in a relatively tight $35-$42 channel over the last few years, we believe macroeconomic conditions are ripe enough that U.S. Energy ETF (IYE) could easily recapture the $55 it commanded before the 2014 oil crash. Indeed, oil has come back. Prices are up 40% so far this year and thanks to easy year-over-year comparisons Energy commodity prices are the second-best-performing asset class. Yet the stocks remain stagnant. This is great news, as there are plenty of value plays out there for investors to get excited about.

Of course, whenever we talk about Energy, we have to talk about OPEC, the global cartel dominated by Saudi Arabia and its rivalry with Iran. The Saudis have been flooding the market lately, which has led to oil’s 6% decline over the last month. However, the latest OPEC meeting acknowledged that oversupply is now a concern and pledged to reduce output over the next month. Additionally, renewed U.S. sanctions on Iran will further normalize production by increasingly taking Iranian supply off the global market.

All of that should lead to a positive increase in investor sentiment by the end of the summer, which in turn should boost the overall sector’s performance. When that happens, a lot of the anxiety that’s held Energy stocks back will ease and we’ll see U.S. Energy take off. Of course you don’t want to wait for that to happen. Investors looking for gains need to be ahead of the curve, which is why we’re recommending the iShares U.S. Energy ETF now while waters are still relatively calm. 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.