Crude oil has been the subject of many discussions lately ever since crude oil prices dropped 50% June of last year. Prices fell even lower in September as a global glut pushed Brent crude oil from a summer peak above $115 to a near six-year low under $46.
The main question currently circulating is: which direction will oil prices will go? Will it slide to $20 a barrel, or will it rise to $70-80? It is not a question that can be answered so easily. To have a clear prediction of the oil prices, one needs to know what caused the oil crisis in the first place.
Now that the dust is slowly starting to settle, it is becoming clearer that the oversupply of oil is not the only factor that caused the drop in oil prices. Other factors include: the sputtering demand from Europe, China and the Middle East who threatened to disrupt supplies but never did, the steady rise in world petroleum supplies-mainly due to the shale-oil revolution in the United States, and the softening demand.
After the free fall since last June, and especially falling hard starting in September, crude oil has been giving some signs of recovery. Crude oil prices remain volatile, but Brent crude oil has gained more than 30% since late January of this year.
According to Canaccord Genuity analyst Stephen Berman, the main drivers for this rally are:
- A drop in the oil rig count in the US that happened much faster than almost anyone expected. Since the start of December, 516 oil rigs have been dropped, representing an astounding 33% of the US fleet in just 10 weeks.
- An accelerating number of wells that have been drilled but not completed as operators delay frac jobs waiting on higher prices and/or lower service costs.
Even though the drop in rig count may have caused the slight recovery of oil prices now, the affect for the long term could be even bigger. According to Banque Nationale de Paris: “The impact of fewer U.S. drilling rigs will only be seen later this year…The changes are more marked in the second half of the year, consistent with the time lag between lower drilling activity and production.”
In light of this slight recovery in oil prices, Stephen Berman picks some of his favorite stocks in the energy sector.
Oasis Petroleum Inc. (NYSE:OAS)
The analyst rates the stock a Buy with a $19 price target.
Burwall noted: “With over 500K net acres, almost all of which are operated, OAS is one of the largest players in the Williston Basin (WB). The company has a large inventory of high-quality Bakken and Three Forks locations in many of the best areas of the WB. OAS also boasts a solid operational track record, resulting in lower than average WB well costs. Fears over a lack of liquidity are somewhat overblown in our view.”
“While the company gave 2015 production and capex guidance on December 10 (5- 10% growth on total capex of $750-$850M), we would not be shocked to see that capex number come down as service costs have declined substantially since then and are likely to continue to fall. Look also for further updates on wells in the Indian Hills and South Cottonwood focus areas. The company reiterated that Q4/14 production should be 47-49 MBoe/d in its December 10 operations update. We are currently modeling 47.8 MBoe/d, with consensus at 48.1 MBoe/d.”
Berman has a -27.6% average return when recommending OAS, and is ranked #3459 out of 3497 analysts, according to TipRanks.com.
Whiting Petroleum Corp (NYSE:WLL)
The analyst rates the stock a Buy with a $44 price target.
Burwall noted: “We believe WLL has substantial upside given its ~855K net acres in the core of the WB, which can be further exploited via downspacing and enhanced completion techniques. Last year’s acquisition of Kodiak Oil & Gas (KOG) bolsters its inventory of high quality WB locations. We also consider WLL’s acreage in the Niobrara to be quite good. In our view, continued solid execution will ultimately result in an increased valuation.”
Furthermore, “We project Q4 production of 131.6 MBoe/d, just above consensus of 129.6 MBoe/d. In our view, the biggest piece of news to come out of WLL’s Q4 release should be its 2015 capex budget and production guidance. WLL is the only one of our E&P names that has not yet announced its 2015 plans. Previously, we had modeled 2015 capital spending of ~$3.9B, roughly in line with what WLL and KOG had done combined in 2014. That would have yielded growth of ~25% pro forma.”
Penn Virginia Corporation (NYSE:PVA)
The analyst rates the stock a Buy with a $9 price target.
Burwall observed: “PVA has built a sizeable ~103K blocky and contiguous net acre position in the volatile oil window of the Eagle Ford (EF) and has generated solid results through the drillbit while bringing down costs at the same time.” He added, “The Company is scaling back like everyone else to preserve capital, costs are coming down, and liquidity should comfortably cover the cash burn we are modeling for the next two years. PVA remains one of our top EF picks and the number one takeover candidate in our coverage universe.”
Berman has a -36.8% average return when recommending PVA, according to TipRanks.com.
Continental Resources, Inc. (NYSE:CLR)
The analyst rates the stock a Buy with a $54 price target.
Burwall stated: “We also believe the SCOOP, especially its latest Springer Shale discovery, to be significantly under-appreciated by the market. Springer oil and Woodford condensate wells should generate robust rates of return (both ~35% IRRs) even in a $55 oil/$3.50 natural gas environment (also assuming 15% cost deflation). Again, any additional cost deflation only boosts rates of return higher. We could also get some early results from its density tests in the SCOOP. Given the sterling economics of the play, we believe an increase in CLR’s de-risked SCOOP inventory would be a big plus.”
Berman has a 6.9% average return when recommending CLR, according to TipRanks.