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All Contents © 2020The Kiplinger Washington Editors
By Maya Sasson, Contributing Writer
| September 19, 2019
Oil stocks have been put through the volatility wringer of late.
On Sept. 14, drones attacked a key processing facility in Abqaiq as well as an oil field in Khurais, temporarily knocking out about 5.7 million barrels of Saudi daily production. That represents half of Saudi Arabia’s output and approximately 5% of global oil supply, so unsurprisingly, the news sent U.S. crude oil prices soaring by almost 15% on Sept. 16 – the largest gain in more than 30 years.
But a day later, oil pulled back nearly 6% following Saudi Energy Minister Prince Abdulaziz bin Salman’s announcement that the country’s oil production will be back at normal levels by the end of September. Crude closed another 2% lower Sept. 18.
Was this merely a quick flash in the pan for energy investors? Maybe. But heightened regional tensions still could bode well for oil prices in the coming months. And Citi analysts argue that the attacks highlight a fundamental problem for the kingdom’s oil production. “No matter whether it takes Saudi Arabia five days or a lot longer to get oil back into production, there is but one rational takeaway from this weekend’s drone attacks on the Kingdom’s infrastructure – that infrastructure is highly vulnerable to attack, and the market has been persistently mispricing oil,” they write.
Here are seven analyst-loved oil stocks to buy in this volatile energy environment. Here, we’ve used TipRanks’ stock screener to find energy stocks that have earned a Strong Buy consensus rating from the analyst community over the past three months. We’ll examine each one, including price targets and what the pros are saying about their potential.
Data is as of Sept. 18.
Market value: $66.6 billion
TipRanks consensus price target: $76.00 (27% upside potential)
TipRanks consensus rating: Strong Buy
ConocoPhillips (COP, $60.01) shares still are off 4% for the year, but the oil-and-gas exploration and production (E&P) company’s stock has surged amid the recent price volatility. Even after the partial oil pullback, COP’s shares still climbed nearly 5% in the three trading days following the Saudi attacks.
But it’s not just the potential for higher oil prices that has analysts excited – it’s how the company has been operating.
ConocoPhillips said on July 30 that second-quarter production reached 1.29 million barrels of oil equivalent daily (ex-Libya), up 6% from the prior-year quarter. Its “Big 3” assets – its Eagle Ford, Bakken and Delaware facilities – saw a combined increase of 41,000 barrels a day from Q1 thanks to “strong execution performance and improved operational efficiency,” COO Ryan Lance said. As a result, COP raised its Big 3 full-year guidance from 350,000 barrels a day to 360,000.
UBS analyst Lloyd Byrne upgraded ConocoPhillips from Neutral, which is equivalent to Hold, to a Buy rating on Sept. 18. He notes that COP’s production remains lower than some of its peers, but he argues it has a key competitive advantage. Namely, it can generate positive free cash flow (the cash profits a company generates after making necessary capital expenditures) and afford its dividend even if oil falls as low as $40 per barrel. Prices sit around $58 today.
“The Eagle Ford can sustain growth for the next decade plus, while the Bakken can sustain flat production for a decade plus, in our view,” Byrne writes. “news around increasing the size of its capital returns program including in the form of a dividend increase, a special dividend or further increase to buyback program”
Goldman Sachs analyst Neil Mehta likes oil stocks ConocoPhillips and Chevron (CVX) for their cash-flow generation, and think both are more attractively valued than integrated oil major Exxon Mobil (XOM). While he says COP’s dividend is meager by comparison, he thinks the company’s analyst day in November could include “news around increasing the size of its capital returns program including in the form of a dividend increase, a special dividend or further increase to buyback program.”
The pair are among seven analysts that have doled out Buy-equivalent ratings on ConocoPhillips over the past three months. Get the lowdown on COP’s full list of analyst ratings at TipRanks.
Market value: $6.0 billion
TipRanks consensus price target: $23.75 (25% upside potential)
Parsley Energy (PE, $18.98) focuses entirely on oil production within the Permian Basin in the Southwest. With more than 200,000 acres throughout the region, Parsley is well-positioned within one of the world’s richest oil basins.
Second-quarter production grew 10% quarter-over-quarter, Parsley reported on Aug. 6. PE’s focus on developing its Upton County (Texas) wells is already paying off with promising early results, “registering a higher oil productivity than comparable 2018 wells,” the company said. As a result, Parsley boosted its full-year net oil production guidance, from 80,000 to 85,000 barrels of oil per day, to 85,000 to 86,500.
Parsley also uses a three-way collar hedging program. Several oil stocks use this type of hedge – a strategy that involves trading options – as a defense against oil-price volatility. While it can cap upside if oil prices spike, it also helps set a protective “floor” of sorts.
Mizuho Securities analyst Paul Sankey, who recently upgraded PE from Neutral to Buy, believes Parsley can achieve more than 10% in adjusted free cash flow yield in 2020. “The remaining key risk for the company had been some uncertainty around the 2020 production growth / capital spending outlook. … That being said, given the company's recent positive operations update, we think that 2020 oil production is skewed higher than consensus,” he writes.
SunTrust Robinson analyst Neal Dingmann is on the same page. He said on Sept. 10 that he expects Parsley to become “FCF positive this month while remaining FCF positive in 2020 even if oil prices fall as low as ~$51 (per barrel). Further, we estimate upcoming incremental shareholder returns as seen with the recent institution of a dividend.” He reiterated his Buy rating and $23 price target, implying 21% upside. See what the rest of the Street thinks about PE at TipRanks.
Market value: $35.4 billion
TipRanks consensus price target: $67.50 (26% upside potential)
This has been a rocky year for Marathon Petroleum (MPC, $53.76), which has zigged and zagged its way to a 9% loss year-to-date, greatly underperforming the broader energy sector’s 8% gains. Nonetheless, of the six analysts to sound off on the oil stock over the past three months, five have been Buy calls, and the lone dissenter was a Hold.
Marathon Petroleum has a diversified business model. In addition to refining, it generates midstream-segment income from its partnership with MPLX LP (MPLX), and it also boasts marketing operations – that is, it sells gasoline via Marathon and Speedway stations.
JPMorgan’s Phil Gresh (Overweight, equivalent of Buy) recently wrote that he favors several coastal refiners, including MPC, Phillips 66 (PSX) and Valero Energy (VLO). He believes Marathon is relatively inexpensive compared to the sum of its parts, and “we hope that the company will look to unlock value soon.”
Jefferies analyst Christopher Sighinolfi recently resumed coverage on MPC with a Buy rating, calling it a “diversified, vertically-integrated cash machine with premier assets.” He also highlights its balance sheet and “clear channels to funnel excess cash to shareholders” as strengths. Find out why other top analysts are bullish on MPC.
Market value: $16.0 billion
TipRanks consensus price target: $144.30 (47% upside potential)
Diamondback Energy (FANG, $98.25), up just 6% year-to-date, is a unanimous Buy among the 11 analysts that have assigned ratings to the stock over the past three months. The performance isn’t befitting a stock that JPMorgan’s Michael Glick says “paces the group on nearly every important measure” and deserves to trade at a premium compared to its peers.
Diamondback, which focuses on the development and exploration of oil and gas reserves in the Permian Basin, operates more than 7,600 horizontal drilling locations across over 342,000 net acres in the Midland and Delaware basins. FANG admittedly missed second-quarter revenue and profit expectations, but it enjoyed substantial growth in terms of production. Following a 149% year-over-year spurt in production to 280,400 barrels of oil equivalent daily, Diamondback upgraded its full-year production guidance and expects to be FCF-positive in 2019.
Glick raised his price target from $149 per share to $152 (54% upside) and maintained his Overweight rating. Goldman Sachs’ Brian Singer (Buy) adds that Diamondback is among the oil stocks that would benefit most if prices resume their uphill climb, given their heavy exposure to the commodity (versus natural gas). See what other analysts have to say about FANG.
Market value: $23.0 billion
TipRanks consensus price target: $185.57 (35% upside potential)
Pioneer Natural Resources (PXD, $137.77) boasts 750,000 acres, containing more than 20,000 drilling sites, in the Permian Basin. And it has rebounded roughly 15% since its mixed second-quarter earnings release Aug. 6, in which it fell short of revenue estimates but exceeded profit expectations and provided strong production results.
Pioneer said its 206,000 barrels of daily oil production was near the top end of its guidance, and that overall production averaging 330,000 barrels daily came in above its internal estimates. The company also made progress toward improving its FCF generation by divesting 3,000 non-core acres in northern Martin County, Texas, and it plans to divest its 27% interest in Midland Basin gas processing infrastructure.
Singer recently told Barron’s that, like Diamondback, Pioneer Natural Resources has little of its production hedged for the fourth quarter. He also lists PXD among other oil stocks – including Brigham Minerals (MNRL), Murphy Oil (MUR) and Continental Resources (CLR) – that are “most exposed to potential near-term oil price upside.”
RBC Capital analyst Scott Hanold is among the seven analysts that have awarded Buy-equivalent ratings to Pioneer over the past three months.
“PXD’s production growth profile, balance sheet and oil hedge book are best-in-class and differentiate vs. peers,” writes Hanold, who reiterated his Buy rating and set a $190 price target (38% upside). “We expect PXD shares to outperform because of the good balance sheet and upside opportunity in its portfolio.” Take a closer look at what the rest of the Street has to say about Pioneer.
Market value: $20.4 billion
TipRanks consensus price target: $75.00 (12% upside potential)
Hess (HES, $66.91) is another oil-and-gas E&P company that boasts operations on five continents. It also used to operate gas stations, but it sold the retail business in 2014 to Marathon, which converted all the locations into Speedways by 2017. (The popular toy trucks, however, continue to roll on.)
Hess sprinted out of the gate in 2019 and has never looked back, its 65% year-to-date gains standing in stark contrast to the rest of the oil stocks on this list. Among other things, analysts are excited about the company’s operations in Guyana.
Most recently, on Sept. 16, Exxon Mobil broke news that 108 feet of oil-containing sandstone was found at the Tripletail-1 well on the Stabroek Block offshore Guyana. Hess owns a 30% stake in the block, Exxon owns 45% and China’s CNOOC (CEO) owns the remaining 25%. Operations there could result in production of 750,000 barrels of oil daily. For comparison’s sake, Hess reported ex-Libya oil and gas net production averaged 273,000 barrels of oil equivalent per day in the second quarter.
BofA/Merrill Lynch’s Doug Leggate sees substantial upside from the Guyana wells, pointing out earlier this year that the company had enjoyed positive results from 13 of 15 exploration wells in the Stabroek block. He recently reiterated his Buy rating on shares, as well as a $75 price target (12% upside). Singer also recently weighed in, maintaining a Neutral rating but upgrading the 12-month price target from $66.50 to $67.50 (1% upside). “We see upside to resource and long-term production estimates from recent discoveries in Guyana with active exploration on the Stabroek and surrounding blocks expected over the next 18 months,” he writes.
Morgan Stanley’s Doug McDermott expressed optimism about Guyana earlier this year, telling Bloomberg, “Hess has an attractive balance of short-cycle shale, which can be flexed up and down with the oil price, and this very attractive longer-cycle development in offshore Guyana.” He recently reiterated his Buy rating and gave HES a $71 price target, implying modest 6% upside. Discover how other top analysts rate HES.
Market value: $47.2 billion
TipRanks consensus price target: $105.55 (30% upside potential)
EOG Resources (EOG, $81.32) is one of the largest crude oil and natural gas E&P companies in the U.S., boasting operations in Texas, Big Sky country, Canada, China and even Trinidad & Tobago. It’s also off nearly 7% year-to-date, putting EOG among numerous oil stocks that have struggled in 2019 but still enjoy strong confidence from Wall Street’s pros.
Significant investment back into the business is paying off for EOG. Second-quarter crude oil improved by 18% year-over-year to a record 455,700 barrels of oil per day, beating internal targets. The company also produced $350 million in free cash flow and repaid a $900 million bond in cash.
“Today, EOG can generate double-digit returns, double-digit organic growth, free cash flow and grow the dividend to a market competitive yield,” CEO William Thomas said in a press release. Indeed, the company announced a 30.7% hike to its quarterly payout back in May, to 28.75 cents per share.
Going forward, the company hopes to further reduce operating costs with a new electric fracking technology powered by its own natural gas supply. The use of this technology could save EOG $200,000 per well.
EOG is one of Singer’s two favorite oil stocks for a higher-price environment, along with Pioneer, given its low amount of hedging for the fourth quarter and 2020.
SunTrust’s Dingmann reiterated his Buy rating in June but actually lowered his price target on EOG from $130 per share to $120, though the implied 48% upside still puts him among the most optimistic of analysts. “Its continued positive well results and industry leading cost structure that allow the company to generate sustained free cash flows while also returning capital to shareholders,” he writes. Check out other top analyst ratings and price targets on EOG.
Maya Sasson is a content writer at TipRanks, a comprehensive investing tool that tracks more than 5,000 Wall Street analysts as well as hedge funds and insiders. You can find more of their stock insights here.