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Brokers Love These Energy Stocks, and Maybe You Should, Too

Nilanjan Choudhury
Improving crude prices may have already primed certain oil producers and related companies for upward momentum.

Oil prices tested the $50-per-barrel mark last week as traders held out hope for price stability amid an improving supply-demand narrative. Data showing the number of U.S. oil rigs dropping for a second straight week helped cement those gains. As a result, U.S. benchmark WTI crude oil ended Friday at $49.89, having risen as high as $50.50 in intraday trading a day earlier.

Oil Back at $50

After having touched close to $42 per barrel in the middle of 2017, crude oil prices have rebounded to almost $50 per barrel in the last few days. Here’s why:

Energy bodies OPEC and IEA both recently raised global oil demand forecasts for this year, helping to tighten the market significantly. Further, the Paris-based IEA said that the global oil supply had come down by 720,000 per day last month to 97.7 million barrels on outages and maintenance in non-OPEC countries.

Meanwhile, according to the OPEC’s latest monthly report, the oil cartel’s production fell by 79,000 barrels a day in August to 32.76 million as output dropped in Libya, Gabon, Venezuela and Iraq. This points to the success of the 14-member group’s output curb initiatives and rising compliance levels.

Adding to the positive momentum, OPEC and fellow exporters are said to be open to extending their production cut agreement beyond its March expiry.

The number of active rigs drilling for crude in the U.S. – an indicator of oil industry activity – fell by 7 to 749 as of Friday, as per data from oilfield services firm Baker Hughes Inc. Pointing to a break in shale drilling activities by exploration companies, a lower rig count is a precursor to drop in production.

Are the Gains Built to Last?

The million-dollar question now is whether the rally marks the beginning of a powerful turnaround in oil prices on the back of deep cuts from explorers, or a temporary surge based on optimistic forecasts.

While we cheer strong inventory draws in the U.S., there are still a host of bearish factors that might induce oil’s fall into the mid-$30s and spell doom for investors. With the number of drilling rigs in the oil patch significantly above the previous year’s count, shale drilling remains resilient. Moreover, restored output from exempted African producers Libya and Nigeria have added to the glut and further slows the rebalancing of the market.

Therefore, although OPEC-led production cut efforts have helped commodity prices recover and stabilize somewhat since late 2016, they remain well below 2014 levels.

In fact, as long as there is big oil surplus, the arduous market environment will continue, suggesting that the odds are firmly stacked against a sustained rally. With U.S. crude production near the highest level in more than two years, money managers do not rule out chances of more pain ahead for energy stocks.

Energy Investing is Tricky

One thing the oil market downturn has taught investors: nobody has much visibility into the future. So, when you think of something as a clear line of sight one quarter, it can soon be overshadowed by an unforeseen event.

To sum up, even as crude prices continue to make their way up, world oil supply remains in a glut and is likely to remain so through 2017. This might make any oil price strength short-lived.

On the contrary though, the commodity’s recovery to $50, predictably, has had a positive effect on stocks in the sector. In particular, savvy investors might view the price bump as the impetus the stocks need after freefalling for three years. Undoubtedly, still a long way to go, but improving crude prices may have already primed certain oil producers and linked entities for upward momentum.

Follow Expert Opinion  

The uncertainty of oil prices means that the future direction of the commodity’s movement is anybody's guess.

In such troubled times, it might be a wise decision to go ahead with stocks preferred by analysts who have a deep fundamental knowledge and understanding of the industry and its companies.

Stocks with brokerage upgrades are often in for a good day and probably more. Consequently, a downgrade may indicate rough days ahead. Whatever the movement, the market tends to react to it. Also, research shows that stocks with broker rating upgrades outperform those that aren't upgraded and they almost certainly record better results than those stocks that get downgraded.

Here Are the Stocks

With the help of our Zacks Stock Screener, we have selected 4 stocks that have been given Strong Buy/Buy rating by 80% or more brokers. A favorable Zacks Rank #1 (Strong Buy) or #2 (Buy), which justifies a company’s strong fundamentals, further adds value to these stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

First on our list is Fort Worth, TX-based Lonestar Resources US Inc. LONE. Lonestar, a Zacks Rank #1 stock, oil and gas exploration and production company with primary focus on the Eagle Ford Shale in South Texas.

The 2017 Zacks Consensus Estimate for this company is a loss of 62 cents, some 79.7% narrower than 2016. Next year’s average forecast is a loss of 34 cents, pointing to another 45.2% improvement on the back of accretive acquisitions and attractive well economics.

Vermilion Energy Inc. VET, another #1 Ranked stock, looks well-positioned for sustained gains. Based in Calgary, Alberta, the upstream energy company boasts of leading positions in Europe, North America and Australia. Vermilion’s stable production profile from a diversified asset base and improvement in cost efficiencies offers multiple platforms for visible growth.

Over 60 days, the firm has seen the Zacks Consensus Estimate for 2017 and 2018 increase 118.2% and 6.4%, to 72 cents and 50 cents per share, respectively.

Houston, TX-based Par Pacific Holdings Inc. PARR is our next pick. The #2 Ranked diversified energy player operates in 4 segments: Refining and Distribution, Retail, Commodity Marketing and Logistics, and Natural Gas and Oil.

Par Pacific has an excellent earnings surprise history. Owner of the largest and most complex refinery in Hawaii with a competitive advantage of being favorably positioned to benefit from cost-advantaged crude, the company has a 100% track of outperforming estimates over the last three quarters.

Then we have Superior Drilling Products Inc. SDPI, an oilfield services provider whose offerings to the oil and gas drillers are aimed at lowering costs and augmenting production efficiencies.

The Zacks #2 Ranked company has managed to grow its revenues across all product lines due to market expansion and increased share. With this trend set to continue over the medium term, Superior Drilling’s top line is expected to witness increase of 117.5% this year and 37.9% in 2018.

Bottom Line

For the novice investors, energy market volatility makes investing a precarious and panicky activity. However, the above-mentioned stock picks are expected to be good bets given their top ranks and brokers’ confidence.

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Vermilion Energy Inc. (VET) : Free Stock Analysis Report
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Lonestar Resources US Inc. (LONE) : Free Stock Analysis Report
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