Shares of offshore energy driller Kosmos Energy (NYSE:KOS) rose a quick 10% in early trading on June 21. There was no company-specific news, but there was an update out of Bernstein that probably helped to boost investor excitement today.
An analyst at Bernstein moved Kosmos from market perform up to outperform. The big-picture background for this is that the analyst expects oil demand to increase by around 10% even as alternative energy options, such as electric cars and hydrogen, continue to expand. That would be a particularly good outcome for exploration and production names across the board, as they look to return more capital to investors.
In addition to upping the rating on Kosmos, Bernstein also increased the stock's price target, more than doubling it. Indeed, the new target of $7.80 per share is well above the previous call of $3.70 and the current stock price of around $3.30 per share. This suggests that there is still material upside from here, assuming the analyst's expectations play out as hoped.
Wall Street tends to like analyst upgrades, so the call from Bernstein is the most likely cause of today's early rally. However, investors should note that oil prices can be very volatile and that Kosmos' debt-to-equity ratio was a hefty 6.5 times at the end of the first quarter. There are notable downside risks here if oil prices retreat, making it more difficult to carry a debt-heavy balance sheet. This is not a good choice for risk-averse investors looking to play the big-picture oil move Bernstein's analyst outlined, given the inherent ups and downs in the energy patch. A larger, more diversified, and financially stronger name like Chevron might be a better choice for most investors.