A Permian Basin Trade From Jefferies

Permian Basin oil stocks have been hit hard in recent weeks, but one analyst has a pair trade idea for investors who think the market's pessimism is too extreme.

The Analyst

Jefferies analyst Thomas Hughes upgraded Cimarex Energy Co XEC from Hold to Buy and raised the price target from $98 to $107. Hughes downgraded Oasis Petroleum Inc. OAS from Buy to Hold and reiterated a $14 target.

The Thesis

Investors are too negative on the Permian Basin, Hughes said, adding that the energy subsector has become a victim of its own success. Permian oil and gas volume growth is expected to significantly outpace pipeline capacity, opening the door to a potential production glut in the region, the analyst said. 

The Permian boom coupled with a recovery in the broad global oil market in 2016 has created a potential tradable dynamic among oil stocks, Hughes said. Oasis shares are up 51 percent in the past three months, while Cimarex stock has dropped 7.8 percent in that time on what Hughes said are overblown concerns. 

“While investors have flocked to operators with exposure outside of the Permian, and we have flagged strong returns in the Bakken, Eagle Ford and DJ, we argue the sell-off in Permian shares offers investors a rarified buying opportunity in some of the best assets (returns and inventory depth) in US E&P." 

Cimarex stock will likely undergo an earnings multiple expansion as longer-term production outlooks improve, and the company could even announce a dividend hike and/or share buyback program as well, the analyst said. 

Price Action

Following the rating changes, Oasis stock initially traded lower by 2.4 percent on Monday morning and was up 0.62 percent at the time of publication. Cimarex shares were up 1.67 percent at the time of publication. 

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