It’s road trip season, and rising gas prices are bringing the pain to each and every one of us.
On news of the latest OPEC deal, oil prices spiked more than 3% Tuesday, pushing the WTI over $70 per barrel for the first time in a month. This as the energy sector looks primed to post its best quarterly gains in almost 7 years.
There’s some doubts over OPEC’s ability to boost production enough, and investors shouldn’t forget the impact of the U.S. opting out of the Iran deal in early May, which sent oil prices climbing.
The energy sector has had a rough few years and the benchmark XLE ETF—which tracks the S&P energy sector—has had trouble breaking through a certain resistance level.
But the latest rally in energy should continue for a while. However, don’t buy the whole sector just yet.
“We are getting to a point where I do think it’s going to continue to be stock specific and not just buying an entire group and just hoping that the whole group goes up,” said Susquehanna market strategist Stacey Gilbert. “There are a couple of names that we would look at…”
These are the stocks I have my eye on:
Marathon Oil (NYSE: MRO)
Consumers recognize Marathon most by the company’s red, white, and blue gas stations sprinkled around the country. But investors should take note of the oil company’s robust production growth and the fact that it’s built to thrive at lower prices – which means higher profits in this environment.
At $50 oil, Marathon is able to generate enough cash to grow production at 10% to 14% annually for the next few years. At $60 oil, the company’s target is to generate $500 million in free cash flow. So you can imagine what oil prices around $70 means for the company.
It’s technical picture is interesting as well.
What I’m seeing here is a bullish cup-and-handle pattern that has broken above the 38.2% resistance of the last fall in share price. And one analyst agrees.
“You’ve actually broken out through that resistance here,” notes Rich Ross, head of technical analysis at Evercore. “You’ve got that big base of support, formed this bullish cup-and-handle that’s a continuation pattern to the upside. On the breakout, you’ve consolidated and held that breakout. It tells me MRO goes higher.”
Diamondback Energy (NASDAQ: FANG)
Diamondback Energy is an oil and gas company operating in the Permian Basin in Texas. The company looks primed for strong stock gains as it ramps up production.
Like Marathon, Diamondback is built to do well even at low oil prices. Right now, the company can sustain its current production and dividend even if oil prices were to fall below $40 per barrel. But with crude in the $70s, Diamondback can easily grow production by upwards of 35% a year within cash flow, and even as high as 45% per year at a sustained higher oil price.
The analysts at Jeffries Financial Group have a Buy rating on FANG with a price target of $170 – $177, which is as much as 36% higher than today’s prices.
Anadarko Petroleum Corp. (NYSE: APC)
Anadarko is one of the biggest oil and natural gas exploration and production companies in the world.
The company has been very smart in securing rail and pipeline contracts that ensure its petroleum products make it to market efficiently. Anadarko recently reported that it had “secured substantial long-term oil transportation capacity with commitments covering more than half the company’s expected 2018 operated production and nearly all of its projected operated production by late 2019.”
Anadarko has rallied over 60% in the last 12 months after unveiling a $2.5 billion buyback program last fall and has since authorized a $500 million increase. The stock has just broken above its high reached in November of 2016 and looks poised to go higher.