Imperial Initiates Coverage Of Oil & Oilfield Services Companies

With energy prices range bound and constrained by the $50-a-barrel upper resistance, oil and oil services companies aren't having the best of the times. That said, these companies are striving to circumvent the hit to the top line from falling oil prices by skimping on costs.

Against this backdrop, Imperial Capital initiated coverage of energy and energy services stocks PDC Energy Inc PDCE, Mammoth Energy Services Inc TUSK, Centennial Resource Development Inc CDEV, Approach Resources Inc. AREX and Solaris Oilfield Infrastructure Inc SOI.

Winning By Differentiation & Diversity

Analyst Jason Wangler is of the view that Mammoth Energy is a vertically integrated service platform, which provides differentiation and diversity. This, according to the analyst, will help the company to pick up incremental work, expand margins, versus peers and drive higher equipment utilization.

Wangler pointed out that the company has been actively growing its geographic and operational footprints and multiple acquisitions over the last 12 months. The analyst expects these moves to help drive EBITDA higher in future quarters and years.

On valuation, Imperial Capital said the stock trades at a compelling level.

See Also: Todd Gordon's Oil ETF Trade

Recent Pullback in PDC Energy A Great Entry Point

Analyst Irene Haas noted that PDC Energy is well positioned in two oily basins. The analyst believes the company is attractively valued and has a trajectory for multi-year production growth, even with a more modest crude price outlook.

The analyst feels the recent pullback presents a great entry point, as the stock trades below its Permian and DJ Basin peers. From a high of $45.88 on July 19, the stock has lost about 19 percent.

Imperial Capital said the stock is still in a "show me" mode regarding its newly acquired assets in the Delaware Basin. The company has been executing and drilling better wells faster in the DJ Basin, which is a more environmentally sensitive region in the U.S.

Solaris A Secular Growth Story

Wangler said Solaris is a secular growth story within a cyclical energy sector. The analyst believes this should drive outsized growth opportunities for Solaris. The analyst thinks Solaris' patented mobile proppant management systems provide a logistical solution to the increasing volumes of sand being used at unconventional.

Imperial Capital expects the company to see continued growth in demand for its systems in the current environment. The firm believes this provides a secular growth story within a traditionally cyclical oil and natural gas business.

Centennial Qualified To Be Best Of Breed

Haas noted Centennial Resource has secured prime acreage in the Delaware Basin and is up and running in record time. The analyst believes the company is well positioned to be a top-tier producer in the Permian.

Haas said the company has all the attributes to be the best of the breed in the Permian, as the team has been adept at finding resource plays early. Accordingly, it has gained experience navigating through various commodity cycles, the analyst noted.

Approach Resources Await Strengthening in Oil Prices

Meanwhile, on Approach Resources, Imperial Capital said it awaits stronger commodity prices and when crude prices strengthen on a sustainable basis, Approach Resources should become better positioned to accelerate growth.

The firm believes if crude prices recover to high $50 per barrel, the company's economics will become more attractive and it might consider running a one rig program. With the run-rate of six days per well, the firm said the production impact will be significant.

In the meantime, the firm said it expects the company to control costs and improve well efficiency. The firm also indicated it would review its view and valuation for the company when oil prices recover.

Rating/Price Target

  • Mammoth Energy – Outperform/$16
  • PDC Energy – Outperform/$66
  • Solaris – Outperform/$17
  • Centennial Resource – Outperform/$22
  • Approach Resources – Outperform/$2.50
Posted In: Imperial Capital - Jason WanglerIrene HaasAnalyst ColorPrice TargetInitiationAnalyst Ratings