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Oil stocks are lagging, but analysts see outperformance for some drillers

Tom DiChristopher

Energy stocks have been lagging the S&P 500 (INDEX: .SPX), but some analysts see a path to growth for some well-positioned U.S. drillers.

The energy sector managed to rally about half a percent on Thursday, but it's still down about 6 percent this year. Meanwhile the S&P 500 has gained about 5.5 percent this year.

For some, the disparity comes down to the belief that oil prices will remain stuck in a narrow range as OPEC continues to cut output and U.S. drillers increase production. That will cap the recovery for oil stocks.

But some independent exploration and production companies stand to reap bigger gains from the oil price recovery than integrated oil companies like Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) and larger independents, said Timothy Rezvan, managing director of energy research at Mizuho Americas.

The bigger players are less nimble and have committed to big shareholder payouts, he explained.

"The companies that are being rewarded here are the companies that have clear growth blueprints" and access to the infrastructure, services and materials necessary to economically drill wells and deliver oil and gas to markets.

That includes companies that were early movers in core oil producing regions, like the Permian Basin in Texas and New Mexico, where the cost of producing a barrel of oil is relatively low. New entrants to the Permian face challenges as the region grows crowded , Rezvan said.

Some of the drillers Mizuho has buy ratings on established Permian players Diamondback Energy (NASDAQ: FANG), which is roughly flat this year, and Energen (NYSE: EGN), down 8.5 percent since the start of 2017.

Investment bank Simmons & Company counts Concho Resources (NYSE: CXO) among its favorite exploration and production companies. Shares of the Permian basin oil producer plunged after it reported earnings on Tuesday, but Simmons said high expectations overshadowed strong financial results and guidance for 2017.

Simmons highlighted Concho's plans to boost oil production by 25 percent this year, stronger-than-expected cash flow and strong hedging, or insurance against falling crude prices. The stock is up 0.5 percent year to date, leading many of its peers.

Among the larger exploration and production companies, Iberia Capital Partners considers Anadarko Petroleum (NYSE: APC) an outperformer for its "superior asset base" and "smoother growth ramp as the industry comes out of the down cycle."

The stock is down 5.4 percent this year, but Iberia thinks Anadarko's exploration efforts can generate long-term growth and its portfolio of oil and gas assets allows the company to lower development costs while increasing returns.

Iberia is also cautious on new Permian players. The firm said investment in long-term projects "continues to be under-appreciated by those that are too busy stampeding like lemmings into the Permian Basin."



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