Energy Producers Heavy Into This Red-Hot Product Could Go Much Higher
Lee Jackson
We have said it before, and it remains perhaps the best way to look at the energy sector after its big roller-coaster ride: What a difference a year makes. The question for investors is, after a 100% run in crude pricing, is the sector just too tired to go much higher, especially in the second half of the year? One firm we cover thinks there is one product area that investors can feel very good about going forward.
In a new Baird research report, the energy team recaps the fourth-quarter earnings results, looking for positives going forward for the balance of 2017. While many feel pricing for crude has upside, the big run and higher spending that will require cash are issues.
Baird points out that the natural gas liquids (NGLs) silo of the sector proved to be the bright spot in fourth-quarter results, and the team has four stocks that are what they call “NGL-HEAVY” rated Buy. All have big upside potential, and the analysts suggest initiating or increasing exposure.
Antero Resources
This company has suffered some as the spot price of natural gas has fallen, but it has big potential for investors. Antero Resources Corp. (AR) is an independent exploration and production (E&P) company engaged in the exploitation, development and acquisition of natural gas, NGLs and oil properties located in the Appalachia Basin.
Headquartered in Denver, Colorado, the company is focused on creating value through the development of its large portfolio of repeatable, low cost, liquids-rich drilling opportunities in two of the premier North American shale plays. It holds over 467,000 net acres in the southwestern core of the Marcellus Shale and over 157,000 net acres in the core of the Utica Shale.
Antero Midstream and MarkWest will jointly develop processing assets at the Sherwood processing facility in Doddridge County, West Virginia, and an additional still to be designated facility also located in West Virginia in the southwestern core of the Marcellus Shale. As a result of the deal, the company raised estimates for the rest of the year.
The Baird price target for the shares is $40, and the Wall Street consensus target is $34.19. The shares closed Tuesday at $23.98 apiece.
Laredo Petroleum
This is a smaller cap story for investors looking for Permian exposure. Laredo Petroleum Inc. (LPI) operates as an independent energy company in the United States. It focuses on the acquisition, exploration and development of oil and natural gas properties, as well as the transportation of oil and natural gas, primarily in the Permian Basin in West Texas. As of December 31, 2015, it had interests in the 135,408 net acres in the Permian Basin and had total proved reserves of 125,698 thousand barrels of oil equivalent.
The company took advantage of its strong balance sheet and stock price to lock up some additional acreage within its current footprint in the Midland Basin. The company spent $125 million to add 9,200 net acres, which works out to roughly $13,500 per acre. That price was very reasonable compared to what rivals paid for acreage in the region last year.
Baird has an $18 price target, and the consensus target is $16.67. The shares closed Tuesday at $13.83.
Pioneer Natural Resources
Many Wall Street analysts love this stock for a pure crude oil play. Pioneer Natural Resources Co. (PXD) operates a modern fleet of more than 24 top-performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units and a range of advanced coiled tubing units.
Pioneer is a huge player in the Permian basin and the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world's second largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain the number one independent player in the Permian, as it is expecting to deliver solid production growth again in 2017.
Pioneer investors receive a tiny 0.04% dividend. The Baird price target is $214 and the consensus price figure is set at $227.32. The stock ended Tuesday at $185.97 a share.
SM Energy
This smaller independent energy company could really feel the effect of a spike in oil pricing. SM Energy Corp. (SM) engages in the acquisition, exploration, development and production of crude oil and condensate, natural gas, and NGLs in onshore North America. It primarily has operations in the South Texas and Gulf Coast region, which focuses primarily on Eagle Ford shale program; Rocky Mountain region, comprising the Bakken and Three Forks formations in the North Dakota; and Permian region, covering western Texas and southeastern New Mexico.
While fourth-quarter production was below some estimates, the company has eight Howard County wells averaging initial production rates of 1,400 barrels of oil equivalent per day and 90% oil, both better than expectations. Top analysts continue to view SM as a transition story with the Permian assets set to drive growth and margin expansion.
The $45 Baird price target is compares with the consensus estimate of $43. Shares closed most recently at $24.65.
These four stocks to buy have big upside to the Baird price target and solid NGL production to complement other their production areas. While more suited to aggressive accounts, they make good sense now as share prices have come in some.
