Oil prices and stocks were spiking on Tuesday after a European stimulus deal helped boost global markets. Brent crude futures rose above $44 for the first time since March 6, just before a production war between Saudi Arabia and Russia sent prices lower.
One analyst says it’s time to buy oil producers because they’ll benefit from steadily rising prices. Simmons Energy’s Mark Lear upgraded his rating to Overweight on Devon Energy (DVN), Diamondback Energy (FANG), and Parsley Energy (PE). He has also been recommending Concho Resources (CXO), which he considers his top pick among oil producers.
The rally in oil prices hasn’t yet been matched by the stocks themselves, Lear notes, but that could change.
Brent crude futures, the global benchmark, were up 3.2% to $44.68 on Tuesday, as West Texas Intermediate crude futures rose by 3.4% to $42.20. Oil stocks were rising, with the U.S. SPDR S&P Oil & Gas Exploration & Production ETF (XOP) up 5.3%.
“The positive sentiment after EU reached a stimulus deal pushed equity markets higher and spilled over to oil markets,” wrote Hans van Cleef, senior energy economist at ABN AMRO Bank.
Lear notes that oil stocks have lagged behind the commodity in recent weeks, with the XOP ETF falling 28% from its recent peak even as WTI futures rose 2% over the same period.
“We’re not out of the woods from a recovery standpoint with COVID’s resurgence impacting demand, U.S. operators returning production capacity to the market in the third quarter and OPEC+ bringing some volumes back in July, but with the second quarter in the rearview mirror and E&Ps expected to generate substantial free cash flow, the second half should prove a good set-up for E&P to get back some of the recent weakness,” Lear wrote.
That should benefit all of the producers. But Lear sees particular value in a few of the companies that have been overlooked by the market in recent weeks.
Devon trades well below other producers, despite having a strong balance sheet and key holdings in the Permian Basin. Lear thinks the stock can rise to $15. It was up 11% on Tuesday to $11.43.
Diamondback is one of the “lowest-cost operators” and can generate free cash flow with oil in the low $40s, Lear wrote. His price target on the stock is $58. It was up 9.7% on Tuesday to $42.32.
Parsley also can make money at lower oil prices, and can maintain or grow its dividend, Lear wrote. His price target on the stock is $17. It was up 9.6% on Tuesday to $11.68.
Write to Avi Salzman at avi.salzman@barrons.com
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July 21, 2020 at 10:47PM
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Oil Stocks Are Rallying. Three Could Surge Even More. - Barron's
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