Billionaire Warren Buffett is best known for being one of the world’s greatest stock investors – but he is also a master of the bon mot, and some his best lines mark out rules that can lead to successful investing. Among his better-known sayings is, “Be fearful when others are greedy, and be greedy when others are fearful.” In other words, don’t follow the herd; look for the opportunity beneath appearances.
Right now, market traders are scared in the oil markets. Prices have collapsed, most notably in the American market, where last week, for the first time ever, the WTI benchmark dropped into negative numbers for the May futures contract. WTI is now trading at just $14, down 73% since the current bear market began, while Brent, the main global benchmark, is trading at $20, a loss of 66%. The steep drops in oil are mainly attributed to the sudden loss in demand due to the economic dislocations caused by the response to the COVID-19 epidemic.
So, there’s plenty going on in the energy industry to get investors good and frightened, but is it the right time to get greedy? A close look at the energy stocks’ situation shows the logic behind Buffett’s advice. The economic freeze, the general bear market, and now the collapse in crude oil prices have all put tremendous pressure on the oil industry, and driven share prices down far below their recent peaks – in some cased, by more than 50%. But in the words of BTIG strategist Julian Emanuel, “Though the times are extraordinary, such oil market distress in the past has signaled a prospective trough in equities, not a prolonged period of distress ahead.”
Some recent minor gains in indicates that the selling may be over, that the chumps have been sloughed off, and that this is the low point buyers have been looking for. RBC analyst Scott Hanold would agree, and he’s tagged three oil stocks as buying opportunities. We’ve pulled up the details from the TipRanks database. Each has a ‘Buy’ rating and over 20% upside potential. Let’s see what else they have to offer.
Diamondback Energy (FANG)
We’ll start with Diamondback Energy, one of the many small- to mid-cap oil producers that have taken advantage of the oil boom in Texas’ Permian Basin – and turned that basin into North America’s top oil producing region. Diamondback’s production totals more than 130,000 barrels of oil equivalent each day.
The company entered 2020 on sound footing. FANG reported $1.104 billion in top-line revenue and $1.93 in earnings per share for the Q4 2019, beating the forecasts on both metrics. In a positive move for investors, the company used the strong quarterly results to announce an increase in the regular dividend, to 37.5 cents per share quarterly. This was a bump of 49%, and put the annualized rate at $1.50 per share. The yield, at 4.2%, is more than double the average dividend yield found among S&P-listed stocks.
Backing his bullish stance on Diamondback Energy, RBC’s Scott Hanold says: “The company is one of few that have amassed a combination of quality assets, strong economic growth, minerals ownership, and a water business, which collectively help provide a competitive advantage. We believe FANG has one of the lowest cost structures in the basin and a corporate cash flow break-even (including dividend) that is among the best in the industry.”
Hanold rates Diamondback shares a Buy, which is supported by a $50 price target. Should the analyst's thesis play out, 38% upside could be in the cards. (To watch Hanold’s track record, click here)
All of that would make FANG an attractive buy, but the stock is now down nearly 50% from its pre-bear market value. With the low point of entry, the high-yield dividend, and the company’s solid base of productive assets, it’s no wonder that it holds a ‘Strong Buy’ consensus rating from the Wall Street analyst corps. Shares are selling for $36.34, and the average price target, at $55.65, is a bit more bullish than Hanold’s – it implies an upside of 53% for Diamondback. (See Diamondback stock analysis on TipRanks)
Pioneer Natural Resources (PXD)
Next up is another Texas oil company, also working in the Permian Basin. The Permian is a rich oil region, and its output has helped turn the US in recent years from a net importer to a net exporter of crude oil products. Pioneer’s land holdings in the region have over 1 billion barrels worth of proven reserves, with a slim majority of 53% being crude oil. The rest is split between natural gas and natural gas liquids.
Pioneer saw increasing earnings from Q4 2018 through the end of last year – five consecutive quarters. The company finished 2019 with $2.36 EPS against the $2.12 forecast and beat its revenue estimates by 6%.
Steady production gains powered the gains in earnings. By Q4, Pioneer was putting out 364,000 barrels per day of oil equivalent. The increased output helped earnings, which in turn allow PXD to maintain its reliable dividend. The company has raised its semi-annual payment 4 times in the past 5 years, with the last increase taking effect this past March. The current dividend, at 55 cents every six months, gives a yield of 1.4%.
Hanold, is his review of Pioneer for RBC, says simply, “We expect PXD shares to outperform because of the good balance sheet and upside opportunity in its portfolio. The company has one of the largest and most contiguous acreage positions in the core of the Midland Basin (Permian).”
Hanold gives the stock a Buy rating, along with a $106 price target that suggests room for 29% upside growth.
Pioneer’s shares have a Strong Buy analyst consensus based on 17 Buy ratings, like FANG above, opposed to just 3 Holds. Wall Street’s collective view of PXD is slightly more conservative than Hanold’s, as shown by the $96.63 average price target, which implies an upside of 18% from the current share price of $77.45. (See PXD stock analysis on TipRanks)
Noble Energy, Inc. (NBL)
Last on our list is another company based in Texas, Noble Energy. Noble holds major stakes in the Permian Basin, as do the companies above, but its portfolio also includes important oil production lands in the Eagle Ford formation, as well, and large natural gas plays in Cyprus and Israel. While the Texas oil fields provide a majority of Noble’s current operations, the Israeli Mediterranean gas fields are estimated to hold as much as 43% of the company’s current reserves.
Opening the Mediterranean gas fields last year, and bringing them to full production, pushed Noble’s capex up in 2019. As a result, the company reported lower results in Q3 and Q4. The Q3 revenue, at $1.12 billion, was down 12% yoy, while Q4’s $1.17 billion was down 2% yoy. EPS for both quarters showed a net loss – in fact, the company posted net losses in each quarter of 2019, after net gains in 2018. The high expenditures and net losses forced the company to cut back its dividend, from 12 cents to 2 cents per quarter, effective for Q1 and to be paid this coming May.
With a capex up, commodity prices, customer demand, and quarterly dividends all down, NBL would seem to be a tough sell. But… the stock’s share price is down 56% since late February, and the company still produces a product that is essential to the economy. Demand will return.
Scott Hanold’s review of the stock sums up its situation succinctly: “NBL developed a strong, diverse portfolio of US shale and international asset base with a balance of commodity price exposure. We believe NBL is able to rely on its low-decline production base and strong balance sheet to navigate the low commodity price environment.”
Hanold’s price target here is $13, indicating confidence in a robust 62% upside potential, and clearly supporting his Buy rating.
With 17 analyst reviews on record, split into 11 Buys, 4 Holds, and 2 Sells, Noble Energy has a Moderate Buy consensus rating. The bulls, however, are mostly in line with Hanold’s view – they give the stock an average price target of $12.83, which implies a 60% upside potential in the next 12 months. (See Noble Energy stock analysis on TipRanks)
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