Oil prices have been on the rise and so have stocks of oil and gas explorers and producers. The SPDR S&P Oil & Gas Exploration & Production ETF is up around 7% so far this year, versus around 12% for crude oil.
There are still some laggards that are trading below industry averages. Pavel Molchanov, an analyst at Raymond James, cites five oil and gas stocks he thinks are particularly undervalued in today’s market and worth a look.
The first is Apache. In a report out this week, Molchanov’s colleague John Freeman cites as positives the company’s capital discipline, return-over-growth capital allocation strategy, high-quality portfolio of globally diversified assets and leverage to higher oil prices this year and beyond.
The analyst says the stock remains the least expensive among its large cap peers – 5 times this year’s expected earnings versus 8 times. He said a joint venture or sale of the company’s midstream assets is forthcoming, it has extra cash flows at $65 per barrel oil, its cost efficiency initiatives are working in West Texas’ and New Mexico’s Permian Basin and it’s had exciting well results in the Midland and Delaware Basins.
Freeman has a price target of $57 per share for Apache’s stock, versus a recent $39.47 (it was trading at $41.36 on Wednesday). That’s up from his $55 target back in March, when the shares were trading at around $36.14.
The second undervalued stock is Marathon Oil. Molchanov said in a note last week that the company stands out as the only explorer and producer with a sizable presence in all four of the main liquids-rich resource plays in the U.S.: South Texas’ Eagle Ford Shale, the Bakken in the Rockies, the SCOOP/STACK prospect in Oklahoma (which is his favorite part of the “story” with the most room to surprise) and the Permian.
The analyst said Marathon offers some of the highest leverage among large-caps to what he expects will be oil price highs in the next six to 12 months. He said the company showed production upside in the first quarter, that the SCOOP/STACK impresses and that it’s tracking toward the high end of “clean” growth of 10% to 14%. He also noted that the company’s 2018 free cash flow is the highest since its separation from its refining assets – “thus, ample room to resume [share] buyback,” he said.
Molchanov has a $22 price target for Marathon’s stock versus a recent $19.23 (it was trading at $21.38 on Wednesday).
The last three companies all live in the small- to medium-size universe and are more “deep value” names, according to Molchanov.
The first is Carrizo Oil & Gas, which has properties in the Eagle Ford and the Delaware. Its first quarter results handily beat analysts’ earnings expectations across the board on the back of higher production, stronger commodity prices and lower costs. It’s trading at 5.8 times this year’s expected Ebitda, versus 6.8 times on average for its peers.
The second is Newfield Exploration, which has assets in the STACK as well as the Rockies and off the coast of China. It also beat analysts’ earnings expectations on the heels of higher production but has been hampered by its higher natural gas mix. “While we recognize the implications of a gassier product mix, we think the recent sell-off is way overblown,” Freeman said last week.
Newfield’s stock is trading at 5.6 times this year’s anticipated Ebitda, versus 6.8 times on average for its peers. Freeman reiterated his price target of $40 per share, versus a recent $26.88 (it was trading at $28.24 on Wednesday).
The final name is Oasis Petroleum, which operates in the Williston Basin and the Delaware. It matched or exceeded analysts’ first-quarter estimates and expects to be cash-flow positive in its exploration and production business this year.
Oasis is trading at 5.3 times this year’s expected Ebitda, versus 6.8 times on average for its peers, and Raymond James expects its stock to rise at least 15%, outperforming the S&P 500 over the next six to 12 months.