LONDON, February 21, 2017 /PRNewswire/ --
OilPrice.com Market Commentary: Amid political uncertainty and the comeback of US oil, this year we're looking at oil and gas companies that were smart enough to do more than survive, and clean energy players who with the right tech savvy and balance sheets that can set them apart from the crowd which include: Concho Resources Inc. (NYSE: CXO), Anadarko Petroleum Corp. (NYSE: APC), First Solar, Inc. (NASDAQ: FSLR), Pattern Energy Group Inc. (NASDAQ: PEGI), Covanta Holding Corp. (NYSE: CVA)
The past two years have had some serious teachable moments for the oil and gas industry. Coming off the high of the shale boom into a very painful detox, smart management weeded out the best from the worst. Now it can be seen who handled the crash the way they should have: by improving efficiency, grasping new technology, refocusing and creating a set-up for future growth.
But the future is also very alternative and given the political uncertainty and speculation, it's necessary more than ever to look at clean energy stocks that don't rely wholeheartedly on support from the federal government.
Solar is tricky for investors, but it doesn't have to be. This is a huge growth opportunity, but it's all about choosing the leanest and meanest balance sheet. Once it is found, this can be considered: wind and solar power are expected to account for 64% of our new power generation capacity over the next 25 years. Growth doesn't even begin to describe it. There are also a huge number of technical advances occurring in the space, with a great deal of research going into perskovite solar cells (a silicon replacement). There is an interesting video here on these latest developments.
Amid the shale boom detox and the amazing alternative energy growth prospects, these are our Top 5 picks for large-cap energy in 2017:
#1 Concho Resources (NYSE: CXO)
The best thing about this independent oil and gas company is that it's a pure-play Permian Basin gig. There is nothing better right now in the U.S. shale patch than the Permian. Concho estimates that there are 5 billion barrels of oil equivalent resource potential underneath its acreage position in the Permian.
The Permian Basin has continued to grow even during the worst of the oil price crisis. While other shale patches were rendered unprofitable, the Permian was the last-man standing. Now it's standing even taller. Drilling in the Permian can still work at sub-$50 oil, which means that deal-making has been furious. In the midst of a global oil price crisis, there was a land rush for acreage here, with companies of all sizes looking for a way to get in. The highest price on record, QEP Resources paid $60,000 per acre to get in this year-that's twice what anyone was paying for Permian acreage even in 2014 in the throes of the shale boom.
So, it is achieved what is undeniably the hottest shale basin in the country, where one can still produce at a profit, and where there are tons of stacked formations. When one has all of this and has a pure player in the Permian, they have what should be one of the best bets of this year.
That brings us back to Concho, which threw down $1.6 billion for 40,000 acres in Permian this year alone. Prior to this, it had 600,000 net acres in Texas and New Mexico, all in the Permian.
One doesn't know what its reserves are today, but as of year-end 2015, it had estimated proved reserves of 623.5 million barrels of oil equivalent, 57% of which is proved developed, and 59% of which is oil. And it's been moving fast on new deals since then.
Even better, Concho is set to deliver 20% oil production growth next year. Wall Street loves it because it's using its cash flow to invest and because the company is considered to have a management team that is careful about how it grows, and how it spends.
One can be looking at double-digit production next year, which would be some major growth at a time when others can't afford to boost output at all.
- Market Cap: US$20 billion
- 50-day moving average: US$137.11
- 200-day moving average: US$132.90
#2 Anadarko Petroleum Corp. (NYSE: APC)
What we're looking at for Anadarko are some strong-and interesting-catalysts coming soon, including:
- Asset sales that are going on gradually
- Simplifying the diversity: Anadarko is everywhere, and while it's got some great venues all over the world, Wall Street likes the refocusing of its US asset base to narrow in the deepwater plays, the DJ Basin and the Delaware Basin.
It's also a good buy right now because it's down 40% from its heyday at the height of the shale boom in 2014, but the catalysts poise it for a boost.
Anadarko has an amazing portfolio, with (as of year-end 2015) proved reserves of 2.1 billion barrels of oil equivalent.
This company has a lot going on, and even though its balance sheet is still highly leveraged and its cash flow isn't great, its stock price has risen almost 45% in the last year.
This one is more difficult to nail down than Concho, but it can be seen as a good play for both short-term and long-term investment. Short-term, we're looking at the operational efficiency efforts, the OPEC output cut deal, and the other catalysts mentioned above. For the long-term, this company has some huge projects all over the world. It's not afraid of rolling in the deep: Anadarko is a major player in the US Gulf of Mexico deepwaters, and it's also all over Africa-from Ghana, Kenya and Algeria, to Cote d'Ivoire, Liberia, and Mozambique. In Latin America, its portfolio includes Brazil and Colombia. And it doesn't stop there. If one finds comfort in diversity-this is it.
- Market Cap: US$39 billion
- 50 day moving average: US$70.62
- 200 day moving average: US$61.67
#3 First Solar (NASDAQ: FSLR)
As mentioned, solar is tough. This is because it takes a lot of capital, for one thing, to manufacture solar panels, keep up with fast-paced technological advancements, and still see a return on investment.
First Solar has the lean balance sheet that can still offer investors a return. It's got US$2 billion in cash, which outweighs its debt load. So far, its returns on capital expenditures have been better than anyone else's in the sector.
This is a smart company. It's not going to be an easy year for solar; first Solar has spent a lot of time improving its technology and efficiencies-enough so to make 2017 a significant year for the company at a time when other solar outfits will be struggling. It's also been making some solid cost-cutting moves to make its balance sheet even leaner. Instead of simply trying to keep up with fast-paced solar developments, First Solar is jumping ahead, ditching its Series 5 models and moving right on to accelerated development of nextgen Series 6 modules, which will hit the market in 2018. From an investor's perspective, this is the best year for First Solar because it's stock prices are still cheap, but the consensus seems to be that they won't be for long.
So far this year, there are already indications that things are moving forward for First Solar. It's 20-day moving average recently surpassed its 50-day moving average. When the same thing happened last October, First Solar saw its stock rally $5.
Overall, First Solar stands out because even though the market is weak, the company itself is strong and it's setting itself up for a possible price spike, possibly even as early as the end of the first quarter. That said, investors should closely watch First Solar's top line, which is heavily skewed towards foreign sales, exposing it to foreign exchange risks.
- Market Cap: US$3.325 billion
- 50-day moving average price: US$32.22
- 200-day moving average price: US$38.68
#4 Pattern Energy Group (NASDAQ: PEGI)
Pattern focuses on wind projects in North America for the most part and it has a leg up on the clean energy competition because it has the ability to acquire new projects with higher cash flow yields-which puts it in a unique position vis-à-vis its larger competitors. The reason being, wind is much less competitive than solar, when we're talking 'farms'. Not only that, wind farms also give higher returns than solar farms. So while they might seem riskier, there's a trade-off.
And right now is a good time to get in on Pattern because it's stock has sold off in the aftermath of a Q3 earnings report. Now Pattern has to fix a few issues with financial controls, but once it does, the stock should start climbing back up.
- Market Cap: US$1.75 billion
- 50-day moving average price: US$19.63
- 200-day moving average price: US$21.61
#5 Covanta Holding Corp. (NYSE: CVA)
Covanta is a bit on the far-side of the clean energy game, building and operating waste-to-energy plants. But in this, it's the leader. Essentially, the company builds and operates plants that incinerate trash (including municipal solid waste) and uses that to generate electricity, with other upsides to the use of these recyclables.
It's not the environmentalists' favorite form of clean energy, but there is every indication that Covanta is the leader in part because it operates safely and has the best technical capabilities.
Not only does the company have an attractive valuation, high yield and nice insider buying, but the new US administration of Donald Trump could very well be a boost to the company, unlike other clean energy players. The reason being, the administration is talking about relaxing emissions controls for power plants to boost coal, but this will be beneficial for Covanta as well for its plants. Secondly, Trump has talked quite a lot about building infrastructure, which spells an increase in production of waste for Covanta to 'process'. For even further upsides, it should fetch a higher price on its recycled metals.
- Market Cap: US$2.06 billion
- 50-day moving average price: US$14.77
- 200-day moving average price: US$15.71
By Charles Kennedy of Oilprice.com
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