On Monday, Perincheril downgraded Cimarex Energy (ticker: XEC), Oasis Petroleum (OAS) and Range Resources (RRC) based on their less-impressive free cash flow growth profiles. But he boosted his price targets on Diamondback Energy (FANG), Occidental Petroleum (OXY), Magnolia Oil & Gas (MGY) and Pioneer Natural Resources (PXD).
J.P. Morgan analysts also found some gems in the oil and gas space in a note on Monday. “After several years of generally dour predictions, we’ve sprinkled in a touch of optimism as we start a new decade,” the analysts wrote. “This should be the first year in the shale era the most companies are FCF [free cash flow] positive, and some meaningfully so, in part driving our optimism on the group relative to the last couple of years.”
Still, dynamics in the industry make investing difficult. Big oil companies like Exxon Mobil (XOM) are struggling in their refining and chemicals divisions, meaning that even if their oil drilling activities become more profitable, their earnings will be held back. Refiners should benefit from new shipping rules meant to reduce the amount of sulfur emissions sent into the atmosphere, but much of that benefit is already baked into stock prices, J.P. Morgan argues.
The most promising stocks include explorers and producers with high-quality business models and some “torque” to higher oil prices, meaning they can benefit if oil prices rise, according to J.P. Morgan. Oil drilling is becoming progressively more efficient, with producers able to pump more oil even as they use fewer rigs. That efficiency should end up flowing to earnings.
With that in mind, J.P. Morgan’s top 10 picks include Canadian Natural Resources (CNQ) among Integrateds, Valero (VLO) in Refining, Concho Resources (CXO), Devon Energy (DVN), Diamondback and Parsley Energy (PE) in Exploration and Production, TechnipFMC PLC (FTI) and Nextier Oilfield Solutions (NEX) in Oil Services, and Enterprise Products Partners (EPD) and Cheniere Energy (LNG) among Energy Infrastructure and master limited partnerships.