Oil prices are rallying, and the global glut of oil from 2014-2016 is finally wearing down. That means investment opportunities.
Brent crude, the international benchmark, has exploded to over $79 a barrel for the first time in four years. But according to Bank of America, this is just the beginning. The firm sees prices soaring to $90 in the first half of 2019. However the firm adds that this figure could go as high as $100.
“Looking into the next 18 months, we expect global oil supply and demand balances to tighten driven by the ongoing collapse in Venezuelan output. In addition, there are downside risks to Iranian crude oil exports. Plus we see a high likelihood of OPEC working with Russia in 2019 to set a floor on oil prices.”
And now Morgan Stanley has chimed in with its own report. The report claims that a shipping revolution will push oil to $90 by 2020. Morgan Stanley’s global oil strategist Martijn Rats explains:
“Over the next few years, we expect tightness in one particular product — middle distillate — to lead to strength in one particular liquid, crude oil, and especially those crudes that look like Brent.”
So which stocks look set to benefit from this golden era? Here we use TipRanks’ stock screener to pinpoint five top energy stocks with big exposure to rising oil prices. All these stocks share a very bullish ‘Strong Buy’ analyst consensus rating. This is based only on ratings from the last three months.
Top Energy Stocks: Pioneer Natural Resources (PXD)
Exploration and production company Pioneer Natural Resources (NYSE:PXD) is fast becoming a pure-play on the Permian Basin. In the Permian Basin alone, Pioneer’s acreage could contain 20,000 drilling locations and a whopping 11 BBOE (billion barrels of oil equivalent). And by divesting assets outside the Permian Basin (including Eagleford, Raton (CO), South Texas, and West Panhandle (TX), Pioneer is set to rake in $600-$900 million.
In any case, the company is in excellent financial position. On PDX’s most recent CEO Tim Dove said: “[Pioneer] continue[s] to maintain the strongest balance sheet in the energy sector, with about $1.8 billion of cash on hand. And as a result, we continue to have very low debt statistics.” At the same time, rising oil prices means “it’s likely that our capital budget for this year of $2.9 billion will be increased.”
And the best part for shareholders is that this excess free cash flow can fund strong stock buybacks and higher dividend payouts.
Overall, this ‘Strong Buy’ stock has received eight buy ratings in the last three months. In this same time period, only one analyst has stayed sidelined. In the last month shares are up 19% and looking forward, analysts are predicting (on average) further upside potential of 21% to $235. Most encouragingly, top Goldman Sachs analyst Brian Singer has just added Pioneer to his exclusive ‘Conviction Buy’ stock list. The move comes with a newly-hiked price target of $231.
Top Energy Stocks: Concho Resources (CXO)
RBC Capital’s Scott Hanold wrote “Time to Flex Your Muscles” on our second energy stock pick. Concho Resources Inc (NYSE:CXO) is now poised to become the biggest player in the Permian Basin. Earlier in April, Concho announced a $9.5 billion deal to snap up fellow Permian fracker RSP Permian.
According to Concho, this deal “creates the largest crude oil and natural gas producer from unconventional shale in the Permian Basin.” Specifically, JPMorgan analyst Arun Jayaram is forecasting 23% annual production growth through 2021 and “significant” free cash flow generation. To top it all off: management is modelling for an impressive $2 billion in acquisition synergies. After the deal closes in Q3, these efficiencies should materialize quickly says management.
In his post-announcement report, Hanold tells clients he is impressed by the ‘complimentary’ deal. He notes that “our well data shows RSPP wells are among the most prolific, portending to improving returns.” As a result: “Core activity should generate industry-leading returns, margins, and growth. CXO has a well-established asset base and is one of the largest producers and the most active operator in the Permian Basin. We think this scale provides significant advantages over its peers.”
According to the Street there is still big upside potential of 25% from current prices. This is based on the stock’s average price target of $186. Plus, our data shows that in the last three months, 11 out of 12 analysts have rated the stock a ‘Buy’.
Top Energy Stocks: Encana Corp (ECA)
Encana Corp (USA) (NYSE:ECA) is already reaping the benefit of higher oil prices. This leading U.S. energy producer just announced a quarterly profit beat due to a broad rise in global prices. “Consistent with our plan, we expect significant high-margin oil and condensate growth in the second half of 2018,” Encana CEO Doug Suttles revealed in a statement.
The company boasts a strong portfolio of diverse resource plays producing natural gas as well as oil. On the oil front, Encana owns assets in the Permian Basin, Eagle Ford, Duverney and Montney resources. Over its five-year plan, the company recently ramped up its guidance for oil production of ~600 MBoe/d by 2022, easily beating Street expectations.
“We like Encana because it has exposure to the most economic resource plays in North America; its best-in-class production and cash flow growth; its focus on achieving improved economics through application of technology balanced by its relative valuation to Permian/Montney names” cheers five-star Canaccord Genuity analyst Dennis Fong. He has a $14.50 price target on the stock — indicating 8% upside potential from current levels.
However the average analyst price target works out at a more bullish $15.17 (13% upside potential). Plus we can see that in the last year, Encana has received 100% Street support. This means non-stop buy ratings (with 6 in the last three months alone).
Top Energy Stocks: Chevron Corp (CVX)
Shares in California-based oil giant Chevron Corporation (NYSE:CVX) are up 7% in the last month — this figure rises to 13% on a three-month basis. Crucially, Chevron has among the highest leverage to oil prices vs peers. In 2017, for example, Chevron produced 2.728 million net oil-equivalent barrels per day.
RBC Capital’s Biraj Borkhataria explains that “Higher commodity prices are obviously a catalyst for any commodity producer, but Chevron would likely benefit more than peers given its high operating leverage, especially with its liquids-heavy exposure.” At the same time, says Borkhataria, “in a higher oil price environment, underlying CFFO [cash flow from operations] could surprise positively (to our $27bn estimate).”
And, “in stark contrast” to rival Exxon, CVX is outperforming right now. “(Chevron’s) positive first-quarter result was an encouraging sign that Chevron is executing well and we remain constructive on the company’s long-term, shareholder-friendly plan,” Barclays’ Paul Cheng wrote earlier this month. With this in mind, he boosted his price target on Chevron to $145 (12% upside potential).
Overall, Chevron boasts five buy ratings and only one hold rating from top-performing analysts. These analysts see Chevron shares rising a further 13% to hit $145. Luckily for shareholders, Chevron is also one of the best Dividend Aristocrats out there with a 3.46% dividend yield.
Top Energy Stocks: Newfield Exploration Co
To round off this list, we have Newfield Exploration Co. (NYSE:NFX) — a stock with big exposure to the oil-rich STACK play in the Anadarko basin of Oklahoma. As Newfield CEO Lee Boothby says, “The Anadarko Basin is the asset that will fuel our growth and transition us to living within cash flow from operations. We expect our development of these assets will yield rapid growth from here.”
Meanwhile Jefferies analyst Mark Lear believes shares look undervalued right now. “The market’s buckshot approach to STACK valuation has created an opportunity in Newfield, where we see 2017 wells outperforming 2014-2016 wells… The company is in show-me mode and should rerate with execution.”
Indeed, turning to our data, we can see that Williams Capital analyst Gabriele Sorbara has just reiterated his Newfield buy rating following ‘great’ Q1 results. “After the market close yesterday, NFX reported great 1Q18 results with a beat across production, EPS and DCFPS [discretionary cash flow per share]” writes Sorbara. He has a $39 price target on the stock. And looking forward, Newfield has now boosted its production guidance by 1.9% to 178.0-190 Mboe/d.
In the last three months, only two analysts out of 12 have stayed on the sidelines. The $36 average analyst price target works out at 25% upside from the current share price. On the bullish end, Piper Jaffray’s David Kistler is forecasting over 55% upside potential for this ‘Strong Buy’ stock.
TipRanks offers investors the latest insight into eight different sectors by tracking the activity of 4,700 analysts, 5,000 financial bloggers and even 37,000 corporate insiders. As of this writing, Harriet Lefton did not hold a position in any of the aforementioned securities.