Image source: Getty Images.
With crude oil bouncing off its lows from earlier this year, it has taken many oil stocks up with it. However, while oil stocks have rallied, some still have a lot farther to go, at least according to analysts. Three, in particular, that analysts think look incredibly cheap right now are Concho Resources (CXO +0.00%), Pioneer Natural Resources (PXD +0.00%), and Parsley Energy (PE +0.00%). In fact, these oil stocks are so cheap that all are selling for less than $0.75 on the dollar in the opinion of these analysts:
|
Oil stock |
Price Target |
Recent Price |
Implied Upside |
|---|---|---|---|
|
Concho Resources |
$173.00 |
$118.50 |
46% |
|
Pioneer Natural Resources |
$197.00 |
$154.50 |
28% |
|
Parsley Energy |
$33.00 |
$26.00 |
27% |
Source: TheFly.com.
Drilling down into this trio
Concho Resources was recently upgraded from equal weight to buy at Morgan Stanley. Moreover, its analysts raised their price target on Concho from $83 per share all the way up to $173 per share, which implies 46% upside from Concho's recent price. Fueling this bullish view is Morgan Stanley's assumption that much stronger oil prices are on the horizon, with it raising its long-term oil price assumption to $80 a barrel. That oil price should drive strong earnings and production growth at Concho Resources due to its underappreciated leverage to crude oil prices.
Meanwhile, analysts at Stephens recently reiterated their bullish outlook on Pioneer Natural Resources, reconfirming its overweight rating and $197 price target. This reaffirmation came after the company announced the acquisition of additional acreage, picking up 28,000 acres for $435 million, which Stephens sees as a "good value." Further, it believes this deal will enable the company to ramp up its drilling activity sooner than expected and deliver stronger production growth next year.
Finally, analysts at Raymond James upgraded Parsley Energy to a strong buy, while boosting their price target to $33 per share. Raymond James is basing its valuation on the view that the company has some of the most economical acreage in the country, which supports the belief that the stock price has further to run to before it "reflects the full potential" of the company's underlying asset base. In Raymond James' view, the market is underappreciating the company's recent acquisitions.
One thing these oil stocks all have in common
What's worth noting is that these analysts are not basing their bullish commentaries on the view that these stocks are cheap by way of traditional valuation metrics. There was no talk of an ultra-low price-to-earnings ratio or a sum-of-the-parts valuation. That is because such methods are difficult to use on oil stocks, especially when oil prices have whipsawed.
Instead, each of these bullish views is based on the ability of all three companies to grow production and earnings in the future as oil prices recover. While analysts were quick to point out the underlying's asset base as a key driver of this growth, what went unsaid was the common denominator. That commonality is that all three operate in the Permian Basin, which is one of the few oil plays that is profitable in the current low oil price environment.
What analysts see is the Permian Basin's ability to create substantial value for these companies as prices continue to recover. In other words, what makes these oil stocks so cheap is the currently underappreciated value of their acreage position in the Permian Basin. That is happening because the market is valuing these companies based on the currently depressed oil market and not the improving oil market analysts see just around the corner.
Investor takeaway
While oil stocks have recovered a lot of lost ground this year, there are still some bargains out there. Some of the most compelling values, according to analysts, are a trio Permian Basin drillers. That is because investors are undervaluing the potential of that play to drive robust returns in a much improved future oil market.
