Our report this week focuses on the Oil & Gas Production sector. Our interviews include highly experience research analysts with strong recommendations for investors.
Pavel Molchanov joined Raymond James in 2003 and began work as part of the energy research team, becoming an Analyst in 2006. He initiated coverage on the alternative energy/clean technology sector in 2006, followed by the integrated/multinational oil and gas sector in 2009. His view is that oil production stocks are going higher in 2018.
“So the equities have been lagging the commodity. There is no single explanation for why that is — there are various elements to it — but we have seen this de-linking. The good news is that it creates relatively easy comparisons into 2018. In other words, if the stocks were to revert back to trading alongside oil as they have traditionally for years and even decades, that would suggest that the equities will be outperforming the commodity in 2018.”
His top picks include Marathon Oil (NYSE:MRO), YPF (NYSE:YPF), and Kosmos Energy (NYSE:KOS). Read the entire interview to get Mr. Molchanov’s reasoning behind these eclectic recommendations.
Noah Barrett is a Research Analyst at Janus Henderson Investors and the lead on the firm’s energy and utilities research team. He agrees with Mr. Molchanov: “I think if crude prices remain at current levels or continue to move higher, 2018 should be a good year for the energy sector as some of the equities catch up with the commodity.”
The caveat? “In U.S. onshore unconventional production, there is an increasingly complex supply chain and greater need for logistics management. If one area of that supply chain, say, water handling or frac sand availability, is compromised, it can limit a company’s ability to complete a well and get production online. As a result, I’m focused on names that have done a good job of building out infrastructure and can handle some of the logistics constraints that we see unfolding as industry activity increases.”
Mr. Barrett picks Antero Resources (NYSE:AR) and Anadarko Petroleum (NYSE:APC) as two of his favorite stock picks to start 2018. Read his reasoning in the complete interview.
Paul Grigel disagrees with his colleagues. Mr. Grigel is an Analyst responsible for providing coverage of U.S. independent exploration and production companies at Macquarie Group Limited. He has a less lofty opinion on the sector as a whole, and while stock prices have lagged, “when you see what the commodity price has done versus what the stocks have done, but if you balance it with where expectations were at the start of the year, I think it’s actually a lot more closely aligned than most people probably realize.”
His recommendation is based on looking where management is incentivized to perform.
“This is an industry where every firm but one for us last year had a production growth metric that was based on absolute production growth. Quite simply, if they wanted to spend more, they could, and they could go hit that growth metric. Changing these metrics to per-share ones that are more aligned with shareholders, focusing more on explicit returns rather than elements that add up to return, it’s critical. It’s a very, very big difference.”
His top picks include Devon (NYSE:DVN), Cabot (NYSE:COG), and Continental (NYSE:CLR). Read his interview in the Wall Street Transcript to get the complete detail on why these are Mr. Grigel’s favorites.
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