KeyBanc Upgrades 3 Oil Stocks On Higher Crude Price Expectations

With oil prices rising amid increasing Middle East tension, KeyBanc Capital Markets upgraded three oil and gas stocks Sunday. 

The Analyst

Leo Mariani upgraded SM Energy Co SM from Sector Weight to Overweight with a $14 price target; Centennial Resource Development Inc CDEV from Sector Weight to Overweight with a $6.50 target price; and Jagged Peak Energy Inc JAG from Sector Weight to Overweight with a $10 price target. 

The Thesis

Jagged Peak and Centennial are particularly “oily” among oil and gas exploration and production companies, Mariani said in an upgrade note. (See his track record here.)

Jagged Peak is especially heavy on oil, which accounted for 76% of its 2019 second-half production, the analyst said. Centennial is also heavy on the oil part of the oil-gas mix at around 56%, he said.

While SM Energy has a smaller oil cut, Mariani said he expects it to increase from 44% to 49% in 2020.

SM Heavily Shorted

SM Energy is one of the most heavily shorted E&P companies, at 17% of its float, Mariani said.

The price is good, too, with the stock down nearly 40% this year, positioning it for rebound, he said.  

SM’s leverage is above its peers, but its liquidity is solid, the analyst said. 

Centennial, Good Value, but Unhedged

Centennial is also one of the more shorted E&P companies, at 13% of its float, and its price is also right, with the stock down about 60% year-to-date, Mariani said. 

The analyst sounded one cautious note on Centennial.

"CDEV is completely unhedged going forward on benchmark West Texas Intermediate pricing, so it is very exposed to potential oil weakness," he said. 

Jagged Peak: Strong Production, Good Value

Mariani views Jagged Peak’s production expectations as conservative and said he expects it to come in near the top end of full-year guidance. It's also a good buy, with a below-peer price, the analyst said. 

Jagged Peak has 71% of its oil volumes hedged in the second half of 2019 and 45% hedged in 2020, giving it “decent near-term benefit," he said. 

Price Action 

Centennial shares were up 28.34% at the time of publication, while shares of SM Energy were rallying by 21.76% and Jagged Peak stock was trading 13.9% higher. 

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