Markets are on a roller coaster lately, up one day and down the next, as Wall Street’s pros and investors alike try to make sense of the constantly shifting news cycle. To wit: In the first week of October, we’ve seen a pretty good September jobs report, President Trump spend three days at Walter Reed Hospital with a case of COVID-19, and on his discharge the President withdrew from negotiations with House Democrats on a new COVID economic stimulus package. It’s enough to make your head spin.
It’s also enough to send the S&P up 60 points one day and down 60 points the next day. Investors are nervous; no one wants to see another economic tailspin, no one wants to see the Administration handicapped by coronavirus, and whether there will be a stimulus package or not, of $1.6 trillion, or $2.2 trillion, or just $400 billion, Wall Street would simply like to have some idea of what’s in the cards.
Watching everything from Wells Fargo, senior global market strategist Sameer Samana summed it all up when he wrote, “While risks remain, such as election and COVID-19-related uncertainty, we believe investors should continue to remain fully invested and we favor U.S. large- and mid-cap companies, and the Information Technology, Consumer Discretionary, Communication Services, and Healthcare sectors.”
With Samana’s outlook in mind, we took a closer look at three stocks backed by Wells Fargo. Running the tickers through TipRanks’ database, we learned that the firm sees at least 70% upside potential in store for each, and all three have earned a “Strong Buy” consensus rating from the rest of the Street.
Northern Oil and Gas (NOG)
First up is Northern Oil and Gas, a small-cap oil and gas exploration company operating in the Williston Basin of North Dakota and Montana. The company’s active plays include wells in the Bakken formation, the region that helped put fracking into the national consciousness. Northern’s reserves include 7.4 billion barrels of recoverable oil, and production, at 1.5 million barrels per day, has increased 30% over the past three years.
Despite the solid production growth, low prices and low demand during the corona crisis have put damper on 1H20 revenues. Earnings, however, are turning around. EPS was just 5 cents in Q1, but jumped to 20 cents in Q2 and is forecast to hit 38 cents in Q3. Unsurprisingly, these gains come as several states are loosening COVID restrictions and overall consumer demand is increasing.
Wells Fargo analyst Thomas Hughes sees the company’s sound acquisition plan – and adherence to it – as the key.
“As NOG improved its balance sheet and cost structure, the E&P sector moved in the opposite direction, particularly within its primary basin of focus (Williston). After closing a ~$300mm acquisition in 2019, NOG has selectively sought what it describes as “Ground Game” opportunities, or smaller, bite-size parcels offering near-term CF accretion due to: (1) superior acreage productivity analysis and (2) a better understanding of upcoming development plans. Since 2Q19, these have totaled >$90mm, and NOG is now on the hunt for more.”
“While a smaller-cap operator, we believe NOG’s limited beta to near-term oil price volatility provides strong FCF assurance, while a strong (and improving) balance sheet brings optionality to capitalize in a buyer-short market,” the analyst concluded.
To this end, Hughes gives NOG shares an Overweight rating (i.e. Buy), along with a $10 price target. This figure suggests a 90% upside potential from current levels. (To watch Hughes’ track record, click here)
Wall Street agrees with Hughes on the potential here; the analyst consensus rating of Strong Buy comes from a unanimous 5 positive reviews. Shares are priced at $5.30 and have an average price target of $14, giving an impressive upside potential of 166%. (See NOG stock analysis on TipRanks)
Bonanza Creek Energy, Inc. (BCEI)
Next up is Bonanza Creek, another small-cap oil and gas explorer in the North American energy sector. This one operating in the Front Range of the Colorado Rockies. Bonanza Creek has active wells in the Wattenberg Field, using fracking and horizontal drilling to extract oil and gas from formations first put into play in the 1970s.
During the second quarter, BCEI reported a 40% sequential decline in revenues, to $36 million, and an EPS net loss of $1.87. At the same time, the stock has managed to retain its value; shares are trading now at the same level they were before their ‘corona collapse’ in early March.
The second quarter also saw capital expenditures come in at the low end of guidance, and debt fall to $58 million. The company expects to repay that outstanding balance by year’s end. That rosy prediction is predicated on meeting annual production guidance – which has been raised to the range of 24 to 25 million barrels of oil equivalent per day. For the quarter, sales volume averaged almost 25K barrels of oil equivalent daily.
At Wells Fargo, analyst Thomas Hughes is impressed by this company’s balance sheet and production opportunities.
“With a net cash balance expected by YE20 and PDP net of debt underpinning a valuation above where the stock trades, we view BCEI as a rare SMID value opportunity which also benefits from low leverage risk… BCEI lacks the scale required to land itself amongst the ranks of Shale 3.0 operators, but in our opinion, this might not necessarily matter given the clear value disconnect… an unlevered balance sheet provides significant dry powder to transact in a market ripe with distress-driven opportunities. Until then, non-operated development should help stabilize volumes until higher oil prices (we estimate $45-50/bbl) warrant development of the company’s Legacy acreage,” Hughes commented.
Hughes’ written opinion supports his Overweight (i.e. Buy) rating – and his $33 price target suggests a robust 72% upside in the next 12 months.
Overall, BCEI’s Strong Buy analyst consensus rating is based on 4 reviews, breaking down to 3 Buys and 1 hold. The stock is selling for $19.16, and its average price target of $31 implies it has room for 61% upside growth ahead of it. (See BCEI stock analysis on TipRanks)
Devon Energy (DVN)
Devon Energy, the last stock on this Wells Fargo list, is another North American energy play. This mid-cap company operates in mainly in the New Mexico-Texas-Oklahoma area, with some additional operations in Wyoming. As of the end of 2019, Devon held over 1.8 million acres of mineral rights and 10,800 producing well. Net production last year was 323 thousand barrels of oil equivalent per day, and reserves totaled 757 million barrel of oil equivalent. Approximately two-thirds of this total is liquids, with the rest as natural gas.
Like the other companies above, Devon is struggling with low oil and gas prices, falling revenues, and low earnings. In Q2, revenues fell sequentially from $2.09 billion to just $394 million. EPS dropped into negative territory with an 18-cent per share net loss.
But there was good news, too. Devon reported greater operational efficiency in the quarter, pushing total capex down to $203 million for the quarter, a savings of 10%. Oil production in the quarter beat the guidance by 3,000 barrels per day, reaching 153K barrels. But most importantly, the company finished Q2 with no debt maturities until 2025 and $4.7 billion in available liquid assets, including $1.7 billion in cash.
Since the second quarter ended, Devon has made two important moves that bode well for future performance. First, Devon completed the sale of its assets in the Barnett Shale, netting $320 million in cash at the closing. And second, the company announced it will enter a ‘merger of equals’ agreement with competitor WPX energy. The merger is an all-stock deal and will create the largest unconventional oil and gas producer in the US.
Analyst Thomas Hughes was impressed by Devon’s merger, and what that transaction says about the company’s overarching plan. Referring to the near-term.
“Management expects to generate ~$575 million of annual cash flow improvements by YE21 through initiative already underway at Devon (~$300mm) and synergies from the [WPX merger],” Hughes wrote.
Looking ahead, Hughes sees Devon following a careful plan with a clear goal in mind.
“We believe the huge portfolio transformation Devon has undergone over the past 5+ years has been an impressive look at how a large-cap, diversified oil producer can pivot its focus. Acknowledging the challenging road Devon has traversed, “New Devon” looks to further focus operations on core parts of U.S. shale by divesting Canadian Oil Sands and Barnett assets (also Rockies CO2). We see the target of “New Devon” as achievable with the remaining U.S. Shale assets being above average, anchored by a strong position in the Delaware.” the analyst noted.
In line with these comments, Hughes rates DVN as Overweight (i.e. Buy). His $18 price target is indicative of an 106% one-year upside potential.
All in all, the 17 recent reviews on DVN include 14 Buys and 3 Holds, supporting the Strong Buy analyst consensus. The stock’s average price target of $15.56 implies a 60% upside from the current trading price of $9.75. (See DVN stock analysis at TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.