3 Energy Stocks to Buy in a Weak Pricing Environment

Oil prices have shown some teeth over the past few months after crashing in the final quarter of 2018. That’s good news for the industry as oil and gas producers were taken aback by the sudden decline in prices last year and had to take desperate measures to control costs.

However, not all oil companies’ fortunes are driven by the strength of oil pricing. Bank of America recently shortlisted seven stocks that can do well even if oil prices are strong. In this article, we are going to take a closer look at three stocks from that list and see why they can be a good bet for investors.

Diamondback Energy

Diamondback Energy [stock_market_widget type="inline" template="generic" color="default" assets="FANG" markup="(NASDAQ: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is coming off a terrific 2018 where it delivered impressive production growth. The pure-play Permian basin operator delivered average production of 130,439 barrels of oil equivalent per day (BOE/day) in 2018, up substantially from the previous year’s output of 79,224 barrels of oil equivalent per day.

This impressive production jump was the key to Diamondback’s financial growth. The company delivered $2.18 billion in revenue for the year as compared to $1.2 billion in 2017 even though its average realized oil price increased less than 10% to $44.73 per BOE in 2018.

The good part is that Diamondback is on track to sustain its impressive growth in 2019 as well. The company’s guidance calls for a 27% increase in its production for the full year, which will be achieved at a lower cost base. Diamondback has lowered its full-year capital budget guidance to a range of $2.7 billion-$3 billion, the mid-point of which is well below last year’s outlay of around $3.5 billion.

Moreover, Diamondback’s well completion costs in the Midland Basin will remain flat at $770 – $800 per lateral foot during the year, while they will decline around 7% at the mid-point to $1,075 – $1,150 per lateral foot in the Delaware Basin. So, Diamondback is on track to deliver impressive production growth at low costs, and that makes it a good bet for investors looking for a resilient oil stock.

Concho Resources

Concho Resources [stock_market_widget type="inline" template="generic" color="default" assets="CXO" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is another shale oil producer that’s looking to drive efficient production growth in 2019. The company did well last year as its total production shot up 36% to 96 million barrels of oil equivalent (MMBoe), or 263,000 barrels of oil equivalent per day.

At the same time, Concho enjoyed stronger pricing during the year. Its average realized price of oil and natural gas increased to $56.22 per barrel and $3.40 per Mcf, respectively. That compares favourably to the 2017 oil price of $48.13 per barrel and natural gas price of $3.07 per Mcf. Not surprisingly, Concho’s net income more than doubled last year as higher production was aided by an increase in oil prices.

In 2019, Concho expects to achieve total production growth in the range of 21%-25%. That’s impressive if we consider that the mid-point of the company’s capital program of $2.8 billion to $3.0 billion is a 17% reduction over its prior guidance range and only a slight increment from last year’s outlay of $2.72 billion.

Concho will drive 94% of its planned capital expenditure for the year toward drilling and completion as it looks to maintain strong production growth on a budget. This will boost the company’s financial performance if oil prices keep rising. But even if they don’t Concho investors can expect the company to deliver stable financial growth in 2019 thanks to its impressive production growth.

Pioneer Natural Resources

Shale oil company Pioneer Natural Resources [stock_market_widget type="inline" template="generic" color="default" assets="PXD" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is another oil play investors should be looking at because of its production growth potential. In 2018, Pioneer’s revenue increased to $9.4 billion as compared to $5.45 billion in the prior year. What’s more, the company’s fourth-quarter cash flow from operations shot up a massive 38% to $915 million, which is really impressive considering the weakness in oil prices.

Pioneer also boosted its dividend by 100%, and all of this was possible because of a 17.5% increase in production to 319,984 barrels of oil equivalent per day for the full year. Of course, the company benefited from an increase in oil prices as well, with its average realized price per barrel of oil equivalent coming in at $42.73 as compared to $35.39 in 2017.

This year, Pioneer expects production growth of 12%-17% as compared to 2018 levels, along with $3.2 billion in operating cash flow based on the current oil pricing environment. This level of production and cash flow will be achieved at a capital spending between $2.8 billion and $3.1 billion, which will be fully funded by the company’s operating cash flow.

So, Pioneer has already protected itself against any further weakness in oil pricing by restricting itself within its means for 2019. And despite that, the company is on track to increase its production in the double digits. So it won’t be surprising to see the company deliver yet another year of strong financial growth, which is why investors should definitely consider this stock for their portfolios.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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