6 Lagging Oil Stocks Ready to Rebound

The energy sector appears to have shaken off its dismal start to the year, rebounding nicely as oil prices continue their rise that began in the latter half of 2017. Yet shares of energy exploration and production companies in the U.S. Permian Basin region are being left behind as investor concerns over supply bottlenecks have directed their attention and cash elsewhere.

The fears are overdone, however, as some analysts see an opportunity for a rebound in names like Cimarex Energy Co. (XEC), Matador Resources Co. (MTDR), Parsley Energy Inc. (PE), Diamondback Energy Inc. (FANG), Concho Resources Inc. (CXO) and Callon Petroleum Co. (CPE), according to Barron’s.

Higher oil prices on rising demand for crude mean higher revenue for oil exploration and production companies, but when the cost of shipping that crude rises in tandem it doesn’t help the bottom line. While the pure play drillers in the Permian basin -- in Texas and several southeastern states -- have the production capacity to meet rising demand, scarce pipeline space and trucking shortages have pushed up their costs. They end up having to sell their production at a significant discount just to offload it, which helps to explain why the discount for WTI crude has been increasing relative to Brent crude.

Bloomberg estimates that eight of the region’s pure play drillers lost as much as $15.6 billion in combined market value over the 15-day period between May 22 and June 5 of this year due to the shipping bottlenecks.

Yet the negative investor sentiment that has arisen in response to the supply constraints is “overblown,” according to Williams Capital Group analyst Gabriele Sorbara. She argues that even the discounted prices that Permian crude is selling for is far above what many producers expected when developing their budgets earlier in the year. (To read more, see: Crude Oil Price Forecast: Bears Gather Round.)

Senior portfolio manager at Wells Fargo Capital Management, Ann Miletti, believes the shipping issue is “temporary” and will be resolved. Cimarex, Matador and Parsley, are “high-quality names” with strong balance sheets and management teams, but are currently oversold, she argues. Once those issues are resolved, shareholders will be rewarded, according to Barron’s.

Jefferies’ analyst Mark Lear also sees the market sell-off of Permian-region stocks as overdone, creating great buying opportunities. He recently upgraded Cimarex from a Hold to a Buy with a price target of $107, about 10% above where the stock was trading at the close of trading on Friday. He expects the company will soon be returning more cash to shareholders.

He also reiterated his Buy ratings on Diamondback, Concho, and Callon, as he raised his forecasts for Brent crude prices from $64 to $77 through the end of this year, from $60 to $75 through next year, and from $65 to $70 through 2020.

Goldman Sachs sees Brent crude rising as high as $82 over this summer, as supply and demand fundamentals suggest a continued deficit even in the face of expectations of OPEC agreeing to lift production. (To read more, see: Crude Oil Price Forecast: Data Is All the Rage.)

Following a gathering of the cartel’s energy ministers last week, OPEC announced an agreement to increase production but gave no specific numbers. For now at least, it looks as though crude prices are facing upward pressure, which should help the Permian Basin producers if they can get the shipping constraint issues resolved.