The price of oil has more than doubled since bottoming out below $30 a barrel in early 2016, yet concerns about future price plunges overhang energy stocks, Barron's reports. The chief worries are that the shale oil revolution in the U.S. will flood the market with cheap crude, and that OPEC's agreement to curb production may unravel. As evidence of woes on the oil patch, the energy sector has slipped from being about 12% of the capitalization-weighted S&P 500 Index (SPX) to only about 6% today, Barron's adds.
Nevertheless, a panel of oil market experts convened by Barron's in mid-February sees net upward pressures on oil prices. They cite global economic expansion that is pushing demand ahead of supply, coupled with infrastructure and staffing constraints that limit the expansion of production in the U.S. and elsewhere. In the realm of geopolitical factors, they note that production is crashing in Venezuela, Libya is holding elections and Islamic State (ISIS) militancy is on the rise in its oil region, while production also may decline in Nigeria.
Here are seven stocks recommended by Barron's panelists, with their share price declines through the close on February 28 versus their 52-week highs, their forward P/E ratios, and the future price gains implied by the consensus price targets from analysts, per data from Yahoo Finance:
- Pioneer Natural Resources Co. (PXD): -13% vs. high; P/E 21; +28% to target
- Genesis Energy LP (GEL): -42% vs. high; P/E 12; +40% to target
- Targa Resources Inc. (TRGP): -26% vs. high; P/E 95; +20% to target
- Anadarko Petroleum Corp. (APC): -13% vs. high; P/E 37; +25% to target
- Noble Energy Inc. (NBL): -20% vs. high; P/E 30; +34% to target
- Cabot Oil & Gas Corp. (COG): -18% vs. high; P/E 16; +33% to target
- Range Resources Corp. (RRC):-56% vs. high; P/E 12; +78% to target
The S&P 500 Energy Index (SPN) is down 8.01% year-to-date and down 5.59% over the past year, according to S&P Dow Jones Indices. The forward P/E for the S&P 500 energy sector was 18.8 as of February 28, while that for the entire index was 17.1, per Yardeni Research Inc.
What Panelists Like
Pioneer is cited by Barron's panelist Charles Robertson for reducing debt on its balance sheet and getting more disciplined about capital spending, while being able to expand output at around 20% per year – a rate far beyond what the largest diversified oil companies can achieve. Robertson heads oil and gas research at Cowen Inc.
"Genesis is a Warren Buffett kind of business: high profit margin, attractive yield, low valuation," according to Gregory Reid, president of Salient MLP Complex, an investment firm specializing in oil infrastructure. Genesis is a pipeline company that currently yields 10.2%. Much of the recent decline in the stock was due to a cut in the dividend to pay down debt, Reid tells Barron's.
Targa controls 20% of the natural gas and natural gas liquids (NGL) gathering and processing capacity in the Permian Basin region of Texas, Reid says. The company recently entered into a $1.1 billion joint venture with a private equity firm to finance expansion in a manner that does not dilute current shareholders. When the facilities are complete in about two or three years, Targa can buy them back, Reid tells Barron's. He expects a further rally in the stock, which yields 8.15%.