Oil has certainly had a tough year, with prices falling well below $50 per barrel and concern from the Street of drops even further. But not all companies are made equal, and some energy companies have bright futures ahead, according to Imperial Capital analysts.
Imperial Capital’s Irene Haas and Jason Wangler initiated coverage on four energy companies, giving each one an Outperform rating.
Diamondback Energy Inc FANG, $110 Price Target
Wangler highlighted Diamondback’s “economic growth in production and reserves” and efforts to drive down costs. These focuses have been worked at through acquisitions in the Midland and Delaware basins.
The company has historically traded at a premium to its competitors. Now that the multiple is near its peers, Wangler advises buying in.
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Resolute Energy Corp REN, $40 Price Target
Moving into the late-2014 downturn, Resolute had an over-levered balance sheet, flat production and a wide geographical spread.
But despite positioning that would thrash other similar companies, Resolute fought through thanks to significant and efficient productivity in its Delaware Basin assets. Wangler believes the strengthening of previous concern areas will make the company a solid investment.
Matador Resources Co MTDR, $32 Price Target
Matador has grown its reserves throughout the commodity cycle, as well as its production and cash flow. Haas also likes the company’s history of identifying and acquiring acreage early and cheaply. Much of the analyst’s positive outlook is derived from Matador’s successful monetization of midstream assets and pattern of reinvestment.
WPX Energy Inc WPX, $18 Price Target
Haas praised WPX’s production base, which is “well balanced” between three major basins, and its production mix of 51 percent oil, 13 percent natural gas liquids and 36 percent natural gas.
“With a sharply focused portfolio, WPX has been able to deliver better wells while improving its overall cost structure,” said Hass in a note, adding that the company is “well hedged” through 2018 and can deliver production growth while keeping spending flat.
Like Pumping Gas, Buy Where It’s Cheap
Looking at the potential upside to these four companies, a clear pattern emerges: the cheaper stocks have more upside potential, based on Haas and Wangler’s estimates.
Compared to Tuesday’s opening prices, WPX’s price target represents a 78 percent upside.
That’s followed by Matador, with a 38 percent upside, then Resolute at 25 percent and finally Diamondback with only a 20 percent upside potential.
WPX’s exceptionally strong potential and cheap price per share make it seem like a clear winner in Imperial Capital’s energy coverage, but investors should take careful note that it's not profitable.
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