On Tuesday, Piper Sandler, a financial services firm, outlined its top picks for exploration and production (E&P) companies as the sector heads into fiscal year 2025. The firm's analysis points to a challenging investment environment, highlighting the strong operating efficiencies and capital discipline of E&P companies in an uncertain macroeconomic landscape. The sentiment in the market has recently favored gas-weighted equities, prompted by significant winter storage withdrawals and the upcoming launch of liquefied natural gas (LNG) export facilities. The power-demand outlook also remains strong.
The analyst from Piper Sandler noted that while U.S. oil growth is expected to slow in FY25, the new administration has pledged to lower oil prices, and with Saudi Arabia and OPEC+ having ample spare capacity, these goals could be achieved.
The firm updated its estimates in light of a revised oil outlook, considering free cash flow (FCF) and enterprise value (EV) sensitivities across various oil and gas price scenarios. The update also includes projections for FY26 and the current discounting of oil and gas prices in market coverage.
Among the E&P stocks, Diamondback Energy (NASDAQ:FANG) was highlighted for its low-cost operations and deep inventory, which positions it favorably compared to its peers. The company's reinvestment rate is the lowest in Piper Sandler's coverage, and it trades at a premium valuation, which the firm believes is justified given its inventory quality and potential for efficiency gains. Diamondback Energy's balance sheet is also strong, with net leverage expected to decrease from 1.0x in FY25 to 0.7x in FY26.
Coterra Energy (NYSE:NYSE:CTRA) was identified as a top pick for gaining gas leverage and for its inventory depth in the Delaware Basin. The company's recent acquisitions have expanded its acreage and location count, and its asset performance has been impressive compared to prior operators. Piper Sandler anticipates that Coterra Energy's conservative guidance may understate the company's potential, given the strong deal accretion.
Pioneer Natural Resources (NYSE:PXD) (NYSE:PR) was recognized for its low-cost operations in the Delaware Basin and its skillful execution of mergers and acquisitions (M&A). The company has consistently delivered strong operating performance and is expected to maintain its output while reducing capital expenditure by 10% in FY25.
Lastly, Crescent Point Energy (NYSE:VRN) (NYSE:CHRD) was seen as having a reversion opportunity in the Bakken region. Despite underperforming in FY24, the company's transformational changes and acquisition of Enerplus (NYSE:ERF) assets are expected to provide a turnaround in FY25. Crescent Point Energy's minimal leverage and superior yield compared to peers suggest that the negative sentiment around the stock may be overstated.
Piper Sandler's analysis reflects a detailed examination of the E&P sector, focusing on companies that are well-positioned to navigate the complexities of the upcoming fiscal year.
In other recent news, Permian Resources has reported robust Q3 earnings for 2024, surpassing both consensus and Citi's projections with an adjusted cash flow of approximately $821.9 million. This financial success is due to production numbers slightly exceeding expectations, despite higher capital expenditures. The company also exceeded oil production expectations with a daily output of 161,000 barrels, leading to an increase in full-year oil guidance for the third time this year.
TD Cowen and Citi have maintained their Buy ratings on Permian Resources, highlighting the company's strong operational performance and financial resilience. Both firms have set a steady price target of $18.00 for the company's shares, indicating confidence in Permian's ability to navigate market volatility.
In other recent developments, Permian Resources has successfully integrated the Earthstone assets, contributing to lower operating expenses, and increased natural gas sales at the Gulf Coast by 50%. The company also boosted its base dividend by 150% to $0.60 per share and increased its buyback authorization to $1 billion.
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