By Philip van Doorn, MarketWatch
Marathon Petroleum Corp.
A screen of the S&P stocks shows something remarkable: the stocks that Wall Street analysts have the most confidence in are concentrated in the oil and gas industry.
There are 80 stocks in the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.0020% with “buy” or equivalent ratings from at least 75% of sell-side analysts polled by FactSet. Among those 80, here are the 10 with the highest 12-month upside potential, based on the analysts’ mean price targets:
|Company||Ticker||Industry||Share 'buy' ratings||Share neutral ratings||Closing price - July 16||Consensus price target||Implied 12-month upside potential|
|Halliburton Co.||/zigman2/quotes/210488727/composite HAL||Oilfield Services/ Equipment||85%||15%||$22.88||$34.93||53%|
|Concho Resources Inc.||/zigman2/quotes/208942254/composite CXO||Oil & Gas Production||89%||11%||$98.80||$145.38||47%|
|Noble Energy Inc.||/zigman2/quotes/210375673/composite NBL||Oil & Gas Production||76%||24%||$21.10||$30.92||47%|
|Diamondback Energy Inc.||/zigman2/quotes/201200230/composite FANG||Oil & Gas Production||100%||0%||$104.11||$150.14||44%|
|Marathon Petroleum Corp.||/zigman2/quotes/207091523/composite MPV||Oil Refining/Marketing||95%||5%||$55.68||$79.11||42%|
|Pioneer Natural Resources Co.||/zigman2/quotes/206736173/composite PXD||Oil & Gas Production||88%||12%||$140.06||$193.79||38%|
|Tapestry Inc.||/zigman2/quotes/207417762/composite TPR||Apparel/Footwear Retail||82%||18%||$31.20||$43.15||38%|
|LKQ Corp.||/zigman2/quotes/210317139/composite LKQ||Automotive Aftermarket||93%||7%||$26.99||$37.00||37%|
|Centene Corp.||/zigman2/quotes/208900023/composite CNC||Managed Health Care||88%||12%||$53.74||$73.53||37%|
|EOG Resources Inc.||/zigman2/quotes/204634330/composite EOG||Oil & Gas Production||84%||16%||$87.00||$114.57||32%|
So seven of the 10 “favorites” are energy names.
One problem with sell-side analysts’ price targets is that they look out only 12 months. That is actually a short period for many long-term investors, especially when you consider that the price of West Texas Intermediate crude oil /zigman2/quotes/209723049/delayed CL00 +1.03% (WTI) is about half its peak of $114.08 hit on April 29, 2011.
Recovery, reversals and a lack of faith
The price of WTI has risen 28% since the end of 2018, but the S&P 500 energy sector has lagged way behind:
Even when reinvested dividends are included, the energy sector’s return has been less than half of the oil-price increase this year.
Looking at a one-year chart comparing WTI and the S&P 500 energy sector, the two have moved roughly in tandem:
But the two-year chart has the energy sector trailing very far behind oil prices:
It seems investors didn’t buy the steady increase in WTI through early October last year, and they have been similarly unimpressed with the 2019 price recovery that has followed a brutal reversal.
Record production but lower shale spending
When discussing oil services and equipment stocks with MarketWatch in late May, Phil Flynn, a senior market analyst at Price Futures Group who writes a daily energy report , said that part of the energy sector was hit particularly hard when oil prices slumped. U.S. shale oil producers significantly reduced their capital spending after that.
So even through U.S. oil production hit a record level in 2018 and a monthly record in April , according to the U.S. Energy Information Administration, domestic production growth over the next few years may be curtailed as demand for oil and gas is increases. Indeed, the number of active U.S. oil rigs declined to a 17-month low last week .
So there is a case to be made for a better supply/demand setup for oil bulls over the next several years, even though the International Energy Agency expects this year’s oversupply to continue in 2020 .