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Permian Drillers Steal the Spotlight: 4 Stocks Worth Tracking

Nilanjan Banerjee
Before taking the final investment decision, ConocoPhillips (COP) will assess the Nuna discovery.

For years, the Permian Basin has been contributing to the United States’ oil production boom. Since 2010, production growth of crude volumes in the prolific basin has crossed 300%. Permian drillers have now become more efficient as they are now deploying lesser rigs to produce more of the commodity.

Although the pipeline bottleneck problem in the basin may act as a damper, favorable oil prices along with production growth of the commodity are likely to support the Permian drillers’ cashflow, thereby helping upstream energy players consistently return capital to shareholders.

Permian Drillers’ Efficiency Improves

In its latest weekly release, Baker Hughes, a GE company BHGE, reported that Permian, which employs roughly half of the nation’s total rigs, has seen a decline in oil drilling rig count for five consecutive weeks.

Despite the decline, the Permian is likely to witness growth in oil production volumes. According to the U.S. Energy Information Administration (EIA), in June, the basin will produce 8,495 thousand barrels of oil per day (MBbl/D), up by 83 MBbl/D from May’s production. Not only that, of all major plays in the United States including Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville and Niobrara, Permian will contribute to 48.9% and 49.1% of total oil production volumes in May and June, respectively, added EIA.

Hence, higher expected production volumes despite decline in oil drilling rig count reflect improving efficiency of the Permian drillers.

Boosting Shareholder’s Returns

Permian drillers are focused on returning cash to shareholders through dividend payments and share buybacks.

Along with its first-quarter 2019 result announcement, Diamondback Energy, Inc. FANG — which exploits and produces oil in the Permian — said that its prime objective is to consistently pay capital back to stockholders. The company has received approval from the board of directors to repurchase up to $2 billion of shares through Dec 31, 2020. Diamondback also recently raised its quarterly dividend payment by 50%.

In December 2018, Pioneer Natural Resources Company PXD, a pure-play Permian driller, got an authorization from its board of directors to repurchase $2 billion common stock. As of May 6, Pioneer Natural has managed to repurchase a total of $328 million worth shares. The upstream energy stock is also returning cash to shareholders through dividend payments. The company recently increased its semi-annual dividend payments by 100% and is also planning to raise dividend further.

Drillers in the Spotlight

Given that Permian has a huge inventory of low-cost premium wells, drillers operating in the basin are likely to keep ramping up oil production. For the higher production levels, most of the Permian drillers expect capital spending related to drilling, completions and facilities (D, C & F) to decline significantly through 2019. This reflects improving capital efficiency levels of such explorers and producers.

It seems to be an opportune moment for energy investors to consider stocks of Permian drillers.  Here, we present two stocks carrying a Zacks Rank #2 (Buy) that are well positioned to gain. There are two other stocks with a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Devon Energy Corporation DVN, headquartered in Oklahoma City, has been ramping up activities in the Permian. The company is allocating 50% of its capital budget toward exploration and production operations in the Delaware sub-basin, inside the broader Permian. This is likely to help the company fulfil expectation of boosting oil production volumes by 17% through 2019.

Moreover, over the past 12 months, the Zacks #2 Ranked firm has returned more than $4 billion capital to stockholders.

With the divestment of its Eagle Ford resources, Pioneer Natural Resources Company has become a pure-play Permian stock. With sole exposure to the nation’s most prolific basin, the Irving, TX-based firm looks to extract as much as 1 million barrels of crude oil every day by 2027.

In the first quarter of 2019, this Zacks Rank #2 company produced more oil than it estimated. Moreover, the company projects oil production from the basin through 2019 in the band of 203 to 213 thousand barrels of oil per day (MBbls/D), higher than 181 MBbls/D in 2018. For increasing production volumes, the company expects capital spending related D, C & F to decline almost 11% through 2019, reflecting improving efficiency in capital spending.

Headquartered in Midland, TX, Diamondback Energy, is a pure-play Permian player having presence across more than 344,000 net acres in the Permian.

The company, with a Zacks Rank of 3, expects oil production growth of 30% through 2019. Importantly, despite reducing its 2019 capital budget, Diamondback expects oil production to grow. Moreover, the company is planning to hike annual cash dividend by 50% through 2019.  

Concho Resources CXO, headquartered in Midland, TX, is a leading explorer and producers in the Permian. The company, with a Zacks Rank of 3, has revised upward its oil production growth projection for 2019 and is expecting to derive sufficient free cashflows to return adequate capital to shareholders.

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Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
 
Concho Resources Inc. (CXO) : Free Stock Analysis Report
 
Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
 
Devon Energy Corporation (DVN) : Free Stock Analysis Report
 
Baker Hughes, a GE company (BHGE) : Free Stock Analysis Report
 
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