Oil has continued its remarkable rise this year, rallying another 10%, to more than $65 a barrel in the U.S. That rebound has taken most oil stocks up with it. However, a handful managed to lose ground this year, including Laredo Petroleum (LPI -0.89%), Concho Resources (CXO), and Cimarex Energy (XEC), which are all down double digits. That sell-off makes them worth a closer look.
Competing catalysts
Shares of Laredo Petroleum have declined about 14% this year. The main culprit was the company's first-quarter results. Not only did it miss earnings expectations, but the company said that Royal Dutch Shell canceled a disputed oil marketing contract with the company. Because of that, Laredo will realize less money per barrel going forward.
This marketing issue is coming at an inopportune time because pipeline issues in the Permian Basin have caused regional oil prices to fall below the U.S. benchmark price. That will impact Laredo's cash flow over the next year, which is what's weighing on its stock price.
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On a more positive note, Laredo sold its midstream business last year, which netted it a large cash windfall. The company plans to use about $200 million of the proceeds to repurchase stock, which is enough money to retire about 10% of its outstanding shares, given the sell-off this year.
That buyback should help offset some of the company's oil pricing problem, which should ease toward the end of next year when new pipelines start up. Since this is only a temporary problem, shares could recover as its oil pricing problems fade next year.
A bold bet on the Permian
Concho Resources' stock is down about 15% this year. Like Laredo, it's feeling the pinch of falling regional oil prices in the Permian. However, some of the fears seem overblown since the company has mitigated much of this issue due to its proactive midstream strategy, which includes multiple options to ensure the flow of its oil and hedges to lock in prices.
Another thing weighing on Concho's stock is its decision to buy rival RSP Permian for $9.5 billion. While the deal will immediately bolster earnings and cash flow per share, as well as its growth prospects, the company paid a big-time premium. However, Concho believes the high price will be well worth it in the long run because the company estimates that it can unlock $2 billion in synergies in the coming years. If Concho's plan works, it will create significant value for investors.
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The market seems to be missing something here
Cimarex has been the hardest hit among this trio, shedding more than 20% of its value this year. The main issue weighing on the company is the pipeline issues in the Permian. While the company has sales agreements in place for its oil volumes over the next two years, it only expects to ship 70% on pipelines, which could impact profits.
However, one thing that set Cimarex apart from many other Permian operators is that it also holds a position in the STACK shale play of Oklahoma. Because of that, it has the flexibility to shift rigs from the Permian to the STACK, if needed, which increases the likelihood that the company can achieve its three-year plan to boost production 10% annually and generate significant excess cash along the way.
That still-bright outlook led several analysts to upgrade the stock to a buy recently. Jefferies was one of them, citing its belief that the company could soon return more cash to investors via a higher dividend or stock buyback. Cowen also recently upgraded Cimarex because it has the market access to deliver on its growth plans. In both cases, the analysts believe that Cimerex's recent sell-off is a buying opportunity.
A short-term blip in a long-term growth story
The Permian Basin is one of the fastest-growing oil-producing regions in the world. While it's about to hit a speed bump in the next year, that seems like a temporary issue. Because of that, investors have the chance to buy several high-octane Permian growth stocks for a lower price, which could enable them to capture big-time returns in the coming years as the region irons out its issues.
While all three companies should benefit from that bright future, Concho Resources looks like the most compelling one to consider buying right now.
