Goldman On E&P: Upgrades Anadarko, RSP, Carrizo, Oasis, Downgrades EP Energy

Goldman Sachs’ Brian Singer mentioned that a sharp reduction in the oil supply in the US, driven by tight credit markets, and non-OPEC point towards a recovery in US oil production in 2017. The analyst raised the coverage view on the E&P and SMID E&P from Neutral to Attractive, while recommending investment in secure shale productivity winners and the “next rung stocks.”

“While we still see a Rocky Road to a New Oil Order recovery, particularly over the next 1-3 months, we see a path emerging for US oil prices to recover to $55-$60 per bbl in 2017 to restart the US shale machine,” analyst Brian Singer wrote.

Anadarko Petroleum

Singer upgraded the rating for Anadarko Petroleum Corporation APC from Neutral to Buy, while raising the price target from $50 to $58.

Singer mentioned that investors are concerned about deterioration in Anadarko Petroleum’s balance sheet in a $35-$40 per barrel WTI oil environment. He believes that there is potential for leverage improvement in 2017 through higher commodity prices in 2017, and potential asset sales would strengthen its balance sheet.

Offshore start-ups and a backlog of curtailed/uncompleted wells provide Anadarko Petroleum a flexibility to maintain or grow production, while reducing its capital expenditure in 2016.

EP Energy

Goldman Sachs downgraded the rating for EP Energy Corp EPE from Neutral to Sell, with a price target of $4.50.

The downgrade is based on a lack of differentiated growth relative to other oil levered companies and a weakening balance sheet, resulting from attractive hedges rolling off at yearend-2016.

Singer noted that despite having development programs in the Eagle Ford Shale, the Permian Basin [Midland Basin], Uinta Basin and Haynesville Shale, the company is likely to record a 25 percent reduction in its production. The trend of declining production is likely to continue in 2017, despite the forecast of higher oil prices.

EP Energy’s leverage is unlikely to improve materially unless the company resorts to asset sales or equity, the analyst added.

RSP Permian

Singer upgraded the rating for RSP Permian Inc RSPP from Buy to Neutral, while raising the price target from $29 to $34. The company’s strong liquidity position at the beginning of 2016 allowed it to weather the low commodity prices.

The analyst expects a reacceleration of drilling activity in 2017 to drive improvement in the company’s leverage metrics, thus easing investor concerns. RSP Permian has also said that it would access capital markets only to fund accretive acquisition opportunities or reaccelerate activity.

“In our view, commodity price improvement, potential accretive bolt-on acquisitions and further resource base expansion should all support shares trading higher over the next 12 months,” the Goldman Sachs report stated.

Oasis Petroleum

The analyst upgraded the rating for Oasis Petroleum OAS from Sell to Neutral, while raising price target from $2.75 to $7.25. The company’s shares are down 63 percent since April 14, 2015, as compared to a 50 percent decline in the EPX and a 5 percent decline in the S&P 500.

Singer believes that a cyclical recovery in oil prices would ease investor concerns over the company’s leverage.

Carrizo Oil & Gas

Goldman Sachs upgraded the rating for Carrizo Oil & Gas Inc CRZO from Neutral to Buy, while raising the price target from $31 to $37.

“While investors have grown concerned over CRZO’s leverage profile we anticipate the firm will exit 2017 at a manageable 3.6x net debt to EBITDA (ttm) and see the potential for non-core asset sales (DJ Basin, Utica) to aid in further deleveraging,” Singer wrote.

The analyst expects commodity price improvements, potential non-core asset sales an Eagle Ford and Permian resource base expansion to support shares to trade higher over the next 12 months.