With West Texas Intermediate prices firming back above $90 per barrel, it’s as if some of the momentum so lacking amid the languor of energy equities late in 2012 has crept back into the energy sector.
Anticipation of the Seaway pipeline expansion helped spark the move in WTI at year-end. However, energy equities showed little inclination to follow suit until the drama of the Fiscal Cliff played out. Then, in just the first several weeks of 2013, the EPX Index of energy equi- ties chalked up a gain of 5.7%, ahead of 4.8% for the S&P 500.
Other factors have helped build confidence, too, including signs of the Chinese economy finding its footing, European economic travails easing, and the U.S. housing sector continuing to strengthen.
In addition, in its first monthly report of 2013, the International Energy Agency boosted its global oil demand estimate for 2013 by 240,000 barrels per day to 90.8 million barrels daily, centered on stronger demand data from China.
This is up from an estimated 89.8 million barrels per day for 2012, revised higher on fourth-quarter demand from the U.S., China and Brazil.
So, assuming a continuing backdrop of $90-plus WTI prices, what crude oil-levered stocks are favored by analysts in the current environment?
Leverage to the Permian Basin, with its multistacked pays, including the Wolfcamp, offers attractive upside for two names followed by Joseph Allman, an analyst with J.P. Morgan in New York.
For investors able to use small-cap names, he favors Approach Resources Inc. with a price target of $44.50. For investors looking for a larger market-cap name, he recommends Pioneer Natural Resources, with a price target of $146. Price targets are set based on companies’ year-end 2013 estimated net asset value (NAV) per share.
Pioneer, based in Irving, Texas, has legacy assets in the Spraberry, and last year had as many as 12 rigs running in its Eagle Ford horizontal play.
“But the most exciting thing about Pioneer is the Wolfcamp horizontal play,” says Allman, who notes the company sought a joint-venture partner to accelerate drilling in the southern part of the play. “Initial drilling results by Pio- neer and others suggest the northern part could be even better.”
At press time, Pioneer announced that Sinochem had been brought in as that joint-venture partner for the southern acreage. Drilling will focus on roughly 200,000 contiguous acres, located mainly in Upton, Reagan and Irion counties. Pioneer says the acreage offers more than 4,000 potential horizontal development locations and a total gross resource potential of more than 2 billion barrels equivalent, with 90% liquids content.The terms of the deal, under which Sinochem bought a 40% stake, call for total proceeds to Pioneer of $1.7 billion, made up of an upfront cash payment of $500 million and a drilling carry of $1.2 billion over six years. Eighty-six horizontal Wolfcamp wells are to be drilled in 2013, 120 wells in 2014 and 165 wells in 2015.
Read the full story in the March 2013 issue of Oil and Gas Investor.