It’s time to zero in on those independent oil and gas producers with exploration activities in the Permian Basin, a hot spot for the industry as a whole, because players in the oil patches of West Texas are preparing for an unprecedented surge in oil and gas reserves.
Economic data released this summer forecasts a doubling of oil production to 5.4 million barrels per day in the region over the next five years. That is more than current output from any single OPEC member other than Saudi Arabia, according to IHS Markit, which follows the economic sector.
The report anticipates a “stunning” level of growth that will comprise more than 60% of net world production growth, come from nearly 41,000 new wells and $308 billion in upstream spending from 2018 to 2023. In addition, production of natural gas and natural gas liquids in the Permian is also expected to double during the period. The report noted the region represented a "unique and growing prominence to the world oil market."
As a result, the stock of at least three independent production and exploration companies popped in afternoon trading by more than 4%. The stocks of Energen Corp. (EGN, Financial) and Centennial Resource Development Inc. (CDEV, Financial) rose by more than 4%. Laredo Petroleum Inc. (LPI, Financial) jumped over 2%. The increases likely also got a boost from a recent announcement that the U.S. was urging its allies to stop the purchase of oil from Iran by November.
The GuruFocus All-in-One-Screener was able to identify the stocks as worth a look, based on stable business operations and core financial metrics. The companies don’t have excessive debt, some are hitting 52-week highs and experiencing significant yet still short-term earnings growth after two conseuctive years of decline.
Multifaceted industry
An energy sector overview from GuruFocus' industry pages shows the sector's broad variety and massive scope.
GuruFocus shows the sector is largely made up of exploration and production businesses, as well as integrated companies like Exxon Mobil (XOM, Financial) and Chevron Corp. (CVX, Financial), which are “integrated” because there are upstream, downstream and midstream sides of the business. Exxon Mobil represents 53.9% of the integrated sector in terms of market cap.
There are also companies like Schlumberger Ltd. (SLB, Financial) and Halliburton Co. (HAL, Financial), which provide the technology and infrastructure to make it all happen.
E&P companies
In terms of market cap, ConocoPhillips (COP, Financial), with 12.7% of the industry, is the largest single entity in the sector, which is dominated by smaller companies. In all, these companies make up 38% of the sector.
Energen Corp.
The Alabama-based company has identified 4,116 net engineered, unrisked potential drilling locations in the Delaware and Midland basins with an estimated 2.5 billion barrels of oil-equivalent, net, undeveloped resource potential, according to its website.
The company has also expanded proven reserves from regulatory approvals for drilling unit downspacing. This approval increases the number of available drilling locations, changes the operating environments, technology enhancements and increases knowledge of field geology and engineering parameters relative to oil and natural gas reservoirs, officials said.
The stock was up 4.13% in late afternoon trading, on its way to $71.60 a share, near its 52-week high of $71.97 a share. Year to date, it is up 25%. Over the last three years, it has gained 7%. The GuruFocus median price-sales chart shows it is trading above historical values.
It is trading at 17.75 times its price-earnings ratio, which is lower than 66% of its peers; it is trading at 20 times its forward price-earnings ratio. It has a price-book ratio that is 1.97 times, or lower than 61% of its peers. And it has a price-sales ration of 5.93, which is lower than 71% of its peers.
The company last reported more than $1 billion in revenue on earnings of $4.02 per share. Its revenue, net income and earnings are on the upswing, compared to a dismal prior two years. Energen reported an average growth in earnings over the last 12 months of 29.9%.
GuruFocus ranks the company with a market cap of $6.99 billion 6 out of 10 in financial strength and 5 out of 10 in profitability and growth.
An assortment of gurus loaded up on Energen stock in recent months, including Jim Simons (Trades, Portfolio), John Paulson (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio). Others bought more, including Michael Price (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss.
Centennial Resource Development
The Colorado-based independent company focuses on the development and acquisition of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin.
Most of its assets are in the core of the Delaware Basin, which is a sub-basin of the Permian. It owns about 80,000 net acres and 2,400 drilling locations. Its portfolio includes about 106 producing horizontal wells.
The company, which was established in 2015, points to a disciplined financial management approach.
On its website, it stated: “We intend to maintain a conservative balance sheet to preserve financial flexibility through commodity cycles. We believe strong liquidity, low debt levels and modest leverage are competitive advantages in any industry environment. Additionally, we plan to invest our capital judiciously and maintain a low cost structure.”
Its stock was up 2.61% in afternoon trading on Wednesday. Shares sold for $18.80 a share. Year to date, the stock is down 5%. Over the last 12 months, it jumped 22%. The stock’s 52-week range is $14.21 to $22.14 a share. The GuruFocus median price-sales chart suggests the stock is priced below its historical value.
It is trading at 36.19 times its price-earnings ratio, which is lower than 94% of its peers, and 20.20 times its forward price-earnings ratio.
Revenues, reported this year at $574 billion, shot up over the last 12 months after dismal performance last year.
The company has a market cap of $5.2 billion. GuruFocus ranks it 6 out of 10 in financial strength and 4 of 10 in profitability and growth.
One red flag spotted by GuruFocus screeners was a Beneish M-Score that indicates the earnings may be manipulated.
Gurus that own the stock include Leon Cooperman (Trades, Portfolio), Cohen, Chuck Royce (Trades, Portfolio) and Jones.
Laredo Petroleum
The Tulsa, Oklahoma-based company operates exclusively in the Permian Basin. At the end of 2017, the company reported net proven reserves of 216 million barrels of oil equivalent. Net production averaged about 58.3 thousand barrels per day in 2017 at a ratio of 72% oil and natural gas liquids and 28% natural gas.
Laredo was trading more than 2% higher in the afternoon on Wednesday. By late afternoon, the stock’s gains were reduced to 1.4% to $9.44 a share. GuruFocus' median price-sales chart shows it is trading below historical value.
Its stock is trading at 3.96 times its price-earnings and 8.03 times its forward price-earnings. Its price-sales ratio of 2.57 times is higher than more than 400 of its peers in the sector. It has a price-book ratio of 2.42 times, which is lower than 79% of its peers in the sector.
The company has been struggling to report consistent revenues. About 27.35% of its float is shorted. Like some of its peers, it reported its first profits in 2018 after two consecutive years of margin declines. Its operating margin spiked to 32.65% this year, which is higher than 81% of more than 420 companies in the same sector.
The company has a market cap of $2.22 billion. GuruFocus ranks it 5 out of 10 in financial strength and profitability and growth.
Other potential Permian Basin buys
The following tickers represent other stocks that do business in the Permian Basin: EOG, PXD, FANG, SN, COG, CRZO, CXO, RSPP, DVN, NFX, OXY, NBL, PAA, MMP, TRGP, KMI, APC, APA, WPX, REN, JAG, HK MCF, XEC, PE, SM MTDR, QEP and AR.
