An E&P Pair Trade Idea From Goldman Sachs

Oil prices have been volatile this week on rising geopolitical tensions among some of the largest global oil producers. Investors who would like exposure to the exploration and production space without all the risk associated with wild swings in oil prices should consider a pair trade based on a pair of Goldman Sachs ratings this week.

The Analyst

Goldman analyst John Nelson on Thursday downgraded Resolute Energy Corp REN from Buy to Neutral and lowered his price target from $52 to $39. Nelson also upgraded PDC Energy Inc PDCE from Neutral to Buy and lowered his price target from $67 to $61.

The Thesis

According to Nelson, easing bottlenecks will trigger an inflection point in PDC’s 2019 volume growth.

“We project PDCE will deliver the highest 2018-19 volume CAGR within N. American Diversified E&P peers, while spending within cash flow from mid-2018, thus we do not view this level of discount as warranted,” Nelson said in a note.

At the same time, Nelson said Resolute Energy is pricing in a 12 percent decline in production in the first quarter of 2018.

“Post outperformance vs. SMID Permian E&Ps, we now see the level of operational execution discounted in shares as being more balanced,” he wrote.

He also said near-term price action could be dictated by activist investors who recently took a stake in the company and even potential buyout rumors.

Traders who wish to user Nelson’s take on the two E&Ps as the basis for a pair trade should consider buying PDC Energy and then shorting Resolute Energy.

Price Action

Following the update from Goldman, PDC Energy stock traded higher by 2.9 percent on Thursday, while Resolute Energy traded lower by 4.2 percent.

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