Oil prices continued their near-month-long, post-September 16, post-Saudi Arabian drone attack slide on Tuesday. After falling 5.5% last week, WTI Crude futures closed down 0.3% at $52.46 yesterday, and Brent Crude was off a similar 0.3%, closing at $59.07.
The reason, unfortunately, is not that the Middle East has suddenly become a safer place to do business. It hasn’t, with a new border war due to break out along the Iraq-Turkey border any day now, and a Saudi response to Iran’s (alleged) strike against its oil facilities still pending. Instead, market participants are becoming more anxious about the next round of U.S.-China trade talks later this week, and what a failure of the two superpowers to reach an accommodation might mean for the global economy.
Naturally, worries like these are pushing the price of oil stocks down in tandem with oil prices. For example, independent oil and gas exploration and production company Pioneer Natural Resources has lost 16% of its value since the September 16 attacks. Another independent producer, CNX Resources, has lost 20%, while yet a third, WPX Energy, is down 21%.
But here’s the good news: According to the consensus of Wall Street analysts, all three of these stocks could go back up — as much as 30%. Let’s take a closer look:
CNX Resources (CNX)
The most heavily leveraged of these three “strong buy” rated oil stocks, CNX Resources boasts a $1.3 billion market capitalization … and $2.8 billion in debt.
Despite all the debt, CNX Resources is a profitable operation, generating more than $300 million in net profit over the last 12 months — enough to give the stock a trailing P/E ratio of just over 4.2. The stock is not free cash flow positive, however, burning through more than $250 million in cash over the last 12 months.
Still, in a note recommending the stock, Jefferies analyst Zach Parham predicted that “a more capital efficient budget than expected in 2020,” combined with plans to “hold production flat in 2021” hold out the prospect for CNX generating positive free cash flow in the near future — which would provide cash CNX could use to pare its debt load.
Parham predicts the stock could close out this year with about $85 million in free cash flow — and grow that number by nearly half, to perhaps $110 million, in 2021. With a $10 price target on the stock, the analyst believes the stock can rise about 40% over the next 12 months. (To watch Parham’s track record, click here)
“CNX remains one of only two Buy rated gassy E&Ps (along with COG), as we believe CNX can generate growth and FCF in 2020, while also having the potential to bring forward value through asset sales (CNXM GP, CNXM units, remaining midstream assets, CBM, etc),” the analyst concluded.
How does Parham’s bullish bet weigh in against the Street? It appears the analyst is not the only one enthusiastic on this oil stock, with TipRanks analytics demonstrating CNX as a Strong Buy. Out of 3 analysts polled in the last 3 months, all 3 are bullish on the stock. With a return potential of nearly 36%, the stock’s consensus target price stands at $9.67. (See CNX stock analysis on TipRanks)
WPX Energy (WPX)
Next on our list today is another three-lettered oil company: WPX. Like CNX, it’s a debt-laden company with strong GAAP profits but no free cash flow to speak of — in fact, WPX burned through nearly a half-billion dollars in cash over the last year. But with a $4.1 billion market capitalization, WPX is a bit bigger, and perhaps a bit better able to manage its debt — which at $2.1 billion net of cash, is actually a bit lighter than what CNX is carrying around.
One bright note on this stock: Last quarter marked the first quarter in more than a year that WPX generated positive free cash flow from its business. It wasn’t a lot — $39 million to be precise — but it might have been a sign of better times to come.
Guggenheim analyst Subash Chandra highlighted positive free cash in Q2 combined with 10% production growth and the prospect of $55-a-barrel oil prices as supporting hopes for consistent cash generation at the company — beginning with another $56 million generated in Q3. While risk-averse investors might prefer to see the company use some of this cash to begin paying down debt, Chandra believes it’s more likely that WPX will deploy its cash as part of “a $400mm stock buyback program” — which to be sure, would also be a plus for shareholders.
“The company pushed the maturity wall to 2023 while reducing borrowing costs […] At $55 oil, we estimate a FCF yield of 9-10% assuming maintenance capex of $900mm next year, with potential upside if WPX can achieve the 15-20% LOE improvements targeted. Markets may worry about Bakken inventory as the play has been the primary oil growth driver. But otherwise WPX has addressed many issues dogging other companies. We expect shares to outperform with our PT upside potential realized if an appetite for 2P resources return,” the analyst opined.
And as far as target prices go, Chandra is even more optimistic than most other analysts. Whereas the consensus on Wall Street is that WPX will go to $15 over the next year (53% upside), Chandra thinks the shares are worth at least $17 — which if correct, would mean 73% profits for investors who buy today. (See WPX Energy stock analysis on TipRanks)
Pioneer Natural (PXD)
Last and far from least, we come to Pioneer Natural — at $20.6 billion in market cap, by far the biggest of these three oil companies. That’s not all that Pioneer stock has to recommend it, though.
With only a $1.6 billion debt load (net of cash), Pioneer sports by far the cleanest balance sheet of this bunch, the least leverage, and the lowest level of absolute debt to boot. It’s also the only one of these companies in sufficiently fine financial fettle to sustain a regular dividend payment — 1.4%.
Evercore ISI analyst Stephen Richardson, who recommends the stock, praised Pioneer for raising its dividend in its Q2 update — a report that also featured reductions in general and administrative spending. Like WPX, Richardson noted that Pioneer is conducting a buyback program, having repurchased $200 million worth of stock in the quarter. The analyst liked the fact that after declaring that he “saw value and … a discount to intrinsic value” in the stock price, Pioneer’s board moved quickly to put its money where its mouth was, and scoop up some cheap stock.
And speaking of cheap … Wall Street in general thinks this stock is pretty cheap, too. Predicting the shares will fetch more than $180 12 months from now, the consensus on the Street is that within a year, people buying Pioneer stock at today’s prices could be sitting on a 46.5% profit! (See Pioneer Natural stock analysis on TipRanks)