After languishing below $50 a barrel for most of the year, crude has snapped back in recent weeks. Fueling those gains are draining oil stockpiles and accelerating demand. Because of this, oil stocks are starting to bounce back.
Additional gains could be on the docket for certain companies -- even if crude hits the ceiling -- because they're built to thrive at lower prices. Three top oil-related stocks with near-term upside potential are U.S. Silica Holdings (SLCA +0.00%), Devon Energy (DVN +2.40%), and Pioneer Natural Resources (PXD +0.00%).
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The catalyst for North American shale
Tyler Crowe (U.S. Silica Holdings): North American shale drilling has become remarkably resilient over the past couple of years. As companies better understand the geology of shale and extraction techniques, the per-barrel costs for oil and gas extracted from shale have gone down considerably. Today, many producers are generating better rates of return at $50 a barrel than what they got in 2012 when oil was twice that much. Lower costs mean that oil drilling will remain steady at a minimum, and natural gas drilling is likely to pick up big time, as new demand sources such as LNG export terminals become operational.
This all bodes well for frack-sand supplier U.S. Silica. The company is already the nation's largest sand supplier, with plans to add another 5 million tons per year of production capacity in the next several months to supply the booming Permian Basin and some of the larger shale gas formations near the Gulf Coast region. Also, the company has proven to be one of the best operators in this industry. The company's more conservative approach prior to the crash meant it has the financial flexibility to make aggressive moves now to increase capacity and take market share from smaller players.
Even though the company is in a good position today, Wall Street still seems to be down on this stock because of recent history. Today, shares trade at a price-to-tangible book value of 2.7 times, the lowest since it went public in 2012. With a more resilient shale-drilling industry in place, U.S. Silica is a stock to put on your radar.
Oil-fueled growth
Sean O'Reilly (Devon Energy): Few U.S. E&P companies have ridden out the current oil downturn as well as shale-driller Devon Energy. While other oil companies have gone belly-up, Devon's management noted in its latest quarterly earnings report that it expects U.S. oil production to rise 18% to 23% in 2017. Not only that, but despite oil hovering stubbornly around $50 per barrel, Devon has been generating free cash flow (FCF) -- money that can be used to expand, make acquisitions, or reward shareholders.
If there exists a "growth oil stock," Devon is certainly a contender. Fueled by its free cash flow generation, sales of non-core assets such as its acreage in the Eagle Ford (netting the company a cool $340 million), and status as part of a $1 billion divestiture program, Devon is primed for an eventual rebound in energy prices. It also happens to be a major player in the white-hot STACK area of Oklahoma. This subsection of the Anadarko basin continues to astound oil drillers with above-average production results.
Analysts polled by S&P Global Market Intelligence expect normalized EPS to grow 22.9% per year from $1.72 in FY 2017 to $3.91 in FY 2021. With shares currently trading hands at ~$34, Devon Energy is one of the top oil stocks to consider buying this month.
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This sale might end soon
Matt DiLallo (Pioneer Natural Resources): Permian Basin-focused Pioneer Natural Resources has been a poster child of the U.S. shale-drilling revolution. The company was a first mover in using horizontal drilling on the legacy oil basin, which has fueled blistering production growth over the past few years. However, it hit a speed bump earlier this year after an unexpected drilling delay and an increase in the percentage of natural gas each well produced caused it to readjust investor expectations.
The market initially took Pioneer's stock to the woodshed on this disappointing news, causing it to shed more than 20% of its value last month. However, investors have begun to realize that the former issue is a temporary setback that the company has already solved, while the latter is actually good news in the long run. Because of that, shares have started to regain their momentum, though the stock is still down double digits from its peak.
That said, the remaining discount might not last much longer, especially once investors fully grasp the fact that Pioneer remains on pace to hit its ambitious long-term goal to nearly triple production by 2026. That's why oil bulls might want to consider scooping up shares of Pioneer this month, because this sale could end shortly.
