Compared to 2019 and, indeed, to the whole decade’s plentiful returns in the market, the energy sector hasn’t provided investors with much to shout about. The S&P 500’s 29% addition this year dwarfs the sector’s 8% increase.
Apart from lacking the obvious “sexy” factor of the high-flying tech sector, the in-demand semiconductor companies or the innovative biotech industry, energy stocks have lagged behind due to macro trends such as low oil and natural gas prices. Climate change has played its part, too, as more socially conscious investors have shied away from oil and gas stocks.
Against this backdrop, TipRanks, a company that tracks and measures the performance of analysts, identified 3 energy stocks with promising growth prospects. All have fared differently in 2019, but the analysts on the Street see major upside potential for all three. According to the platform’s Stock Comparison tool, all currently have a Strong Buy consensus rating.
Kosmos Energy Ltd. (KOS)
The execs at Kosmos Energy must have missed the memo about 2019 being a letdown for the industry. The upstream oil company has not only beaten the sector but also the broader market. Its share price is up by 36% year-to-date.
It hasn’t all been smooth sailing, though. In December, one of Kosmos’ partners, Tullow Oil, suspended its dividend and lost both its CEO and COO following an announcement that it expects production for 2020 to come down from this year’s 87,000 barrels per day (bpd) to between 70,000 and 80,000 bpd. Additionally, 2021-2023 production is expected to be around 70,000 bpd.
The news caused Kosmos’ share price to drop by over 14%. Why, then?
Tullow’s worst performers are its Ghana assets, and Kosmos is a partner in the Jubilee field off the coast of Ghana. The fact that one of Kosmos’ partners is in disarray could impact the company’s cash flow and other offshore developments.
Fortunately, Kosmos has other projects with more reliable offshore partners. As long as these projects keep moving ahead, Kosmos’ long-term fortunes won’t be tied to those of Tullow's.
RBC’s Al Stanton notes the negative news has “painted Kosmos into a corner.” The 4-star analyst remains confident though, noting, “operator BP (a Kosmos partner) is pushing ahead with the Tortue gas development, and other projects offshore Mauritania and Senegal are expected to generate industry interest.”
Therefore, Stanton maintained an Outperform rating on KOS, but lowered his price target from $8 to $7. Nevertheless, investors stand to pocket a handsome 26% gain should the target be met. (To watch Stanton’s track record, click here)
The news hasn’t dampened the Street’s enthusiasm either. 5 Buy ratings from all 5 analysts tracked over the last three months amount to a Strong Buy consensus rating. At $8, the average price target presents upside potential of 45%. (See Kosmos stock analysis on TipRanks)
Callon Petroleum Company (CPE)
On the other side of the spectrum, we come across Callon Petroleum. The company operates in the Permian Basin and southeastern New Mexico, focusing solely on the drilling and selling of crude oil. Year-to-date, the energy company is down by 28%. This is a bad look for any company, but as any canny investor knows, beaten-down stocks can be the ones to watch.
Earlier this week, the company closed the acquisition of Carrizo Oil & Gas. The merger gives Callon 58% ownership of the company and means it now collectively owns approximately 200,000 net acres in the Permian and Eagle Ford shale, and a further 900,000 in the Permian's Delaware Basin. Management expects the new merger to bring in over $300 million of free cash flow between 2020 and 2021.
RBC’s Brad Heffern thinks “the post deal trading multiples and FCF yield screen well versus the peer group.” The analyst added, “We like the company's strong asset positions in the Permian and Eagle Ford Basins. Given the recent acquisition of CRZO, we think CPE has successfully transitioned from a Permian pure play growth story, to sustainable corporate return model with asset diversification, centered around sustainable growth and free cash flow generation.”
Accordingly, Heffern reiterated an Outperform rating on Callon. The 4-star analyst’s price target is $8, indicating Heffern’s confidence in CPE’s ability to add 71% to its share price over the coming year. (To watch Heffern’s track record, click here)
Does the rest of the Street think the beaten-down stock is ready to surge, too? Yes, it does. Callon’s Strong Buy consensus rating is formed of 7 Buys and 1 Hold. Though, not quite as enthusiastic as the RBC analyst’s take, the average price target of $6.56 still presents potential upside of 40%. (See Callon stock analysis on TipRanks)
Vistra Energy Corporation (VST)
Positioned performance wise somewhere between our previous stocks is Texas based Vistra Energy. While not in the red in 2019, the energy provider is actually lagging slightly behind the sector, adding 3% to its share price year-to-date.
The company’s latest earnings report displayed strong third quarter results, among them adjusted EBITDA of $1.064 billion, beating the Street estimate of $1.045 billion, while also raising 2019 guidance to $3.32-$3.42 billion from $3.22-$3.42 billion. Additionally, the company provided 2020 guidance that was 20% higher than 2019’s guidance.
Vistra has been busy on the acquisition side, too. Following the completion of its Crius Energy acquisition in July, the company finalized its purchase of Dallas based Ambit Energy for $475 million in November. The deal increases Vistra’s share of the ERCOT (the electric reliability council of Texas) residential market from 25% to approximately 32%.
Evercore’s Greg Gordon believes Vistra’s “long-term outlook is compelling.” The 4-star analyst said, “VST has been consistent optimizing revenue outcomes through load shaping, portfolio optimization and hedging… VST could still be a positive earnings revision story as our forecast is conservative on a few fronts, especially if ERCOT remains tight as backward dated prices should improve. Given their capital discipline (returning capital to shareholders, strengthening the balance sheet), If they deliver stable cash flow through economic/commodity cycles, VST should command a higher valuation, in either the public or private market.”
To this end, Gordon kept an Outperform rating on VST, alongside a price target of $32, implying an upward tick of 36% could be in store. (To watch Gordon’s track record, click here)
The Street must be reading off the same hymn sheet as the Evercore analyst; No Holds or Sells, simply 5 unanimous Buy ratings bestow Strong Buy status on the energy provider. The average price target of $32.80, indicates handsome upside of 40%. (See Vistra price targets and analyst ratings on TipRanks)