Crude Oil on the Rebound: Buy These 3 E&Ps
Yesterday, the U.S.-traded West Texas Intermediate (WTI) crude futures got some respite from a four-month slump, with the benchmark advancing 92 cents to $82.70 a barrel, bouncing back from $79.78 earlier in the session, the first drop below $80 since June 2012.
The Oil Slide: Ample Supply vs. Weak Demand
Despite the recovery, crude price is still down approximately 25% from its 2014 high in June. The commodity is reeling from the effects of booming shale supplies in North America, weakening growth in China and a stagnant European economy. Moreover, a stronger dollar made the greenback-priced crude dearer for investors holding foreign currency.
On top of that, OPEC members (like Saudi Arabia) have made it clear that they are more intent on preserving market share rather than attempting to arrest the price decline through production cuts. Finally, the downward slide was precipitated by a recent forecast from the Paris-based International Energy Agency (:IEA) – a major energy consultative body of industrialized countries – which projects that oil consumption this year will increase at the slowest rate in five years.
Reasons for Yesterday’s Rebound
Thursday’s breather by the oil market came on the back of mixed data from the U.S. Energy Department's weekly inventory release. Though crude inventories jumped by a higher-than-expected 8.92 million barrels for the week ending Oct 10, 2014, supplies of gasoline fell by 4 million barrels to reach their lowest level in almost two years. Some technical trading ahead of options expiry for U.S. crude also helped stabilize the market.
Lack of Consensus on Future Direction
Considering the topsy-turvy world of fluctuating oil prices, only time will tell where it will go next. As of now, there’s real disagreement between market analysts as to whether the nascent rally would take the commodity higher.
3 Stocks to Consider Buying
For investors who see yesterday’s oil price recovery as a prelude to a big rebound, we present three companies that may deserve attention. Each of them also has a good Zacks Rank.
Cobalt International Energy Inc. (CIE): It is a leading oil-focused deepwater exploration and production company with major presence in the U.S. Gulf of Mexico and offshore Angola and Gabon. This Houston-TX based Zacks Rank #1 (Strong Buy) upstream operator’s rich assets and several high-impact exploration success results helped it deliver positive surprises in 3 of the last 4 quarters with an average beat of 9.41%.
With exciting new ventures set to create more exciting drillable prospects, Cobalt International, which jumped 4.7% in Thursday’s trading, is nicely poised to further expand into the deepwater market.
Bonanza Creek Energy Inc. (BCEI): Denver, CO-based Bonanza Creek conducts oil and gas finding operations primarily in the liquids-rich acreage of the Rocky Mountains and the Mid-Continent regions. In addition to trading around 21.2 times forward estimates (substantially under the peer group average of 27.83), the company sports a trailing 12-month return on equity (:ROE) of 11.7% – against its peer group average of just 2.2%.
This speaks to Bonanza Creek Energy’s efficient management that has consistently maintained a solid balance sheet with low leverage. Bonanza Creek, which surged 8.3% yesterday, currently has a Zacks Rank #2 (Buy).
Diamondback Energy Inc. (FANG): A Zacks Rank #2 stock that was up 5.2% yesterday, Diamondback Energy is an independent exploration and production company engaged in the acquisition, finding and development of unconventional onshore oil and gas properties. The Midland, TX-based company’s operations are concentrated primarily in the Permian Basin of West Texas.
Having done a stellar job at raising production and reserves from its assets, analysts are predicting strong earnings growth for Diamondback over the next couple of years. The 2014 Zacks Consensus Estimate is $2.62, representing 109% earnings per share growth over 2013. Next year’s average forecast is $3.89, corresponding with 48% growth.
Bottom Line
While all crude-focused stocks stand to benefit from recovering commodity prices, companies in the exploration and production sector are the best placed, as they will be able to extract more value for their products.
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