The outlook for the U.S. economy is encouraging now, triggering demand for fuel since more people will start traveling now for work. Thus, with the broader energy sector having recovered significantly, it would be wise for investors to invest in upstream players operating in the Permian basin.
Encouraging US Economic Growth Outlook
According to the Organisation for Economic Co-operation and Development (OECD), the U.S. economy will grow 6.5% in 2021. The forecast issued in December was pegged at 3.2%. OECD also lifted its estimate for U.S. economic growth for 2022 to 4% from 3.5%.
Notably, the rollout of vaccines on a massive scale and the $1.9-trillion stimulus package boosted the economic growth forecast. President Joe Biden has outlined a plan to widen the eligibility criteria of coronavirus vaccinations for all adults by May 1. This will likely bring the country very close to normalcy by the Independence Day weekend, Biden added. Notably, the news that Biden has signed the stimulus bill into law has also brightened the country’s economic outlook.
Room for Further Oil Price Recovery
An encouraging outlook for U.S. economic growth has paved the way for further oil price recovery on the back of improving demand for fuel. In fact, the commodity price, which is trading closer to $65 per barrel (at pre-pandemic levels), has improved significantly since April 2020, when oil was in the negative territory.
Recently, the price of oil jumped to record levels in more than a year after it was decided by OPEC+ (OPEC and its non-OPEC partners) that they will extend most of the oil output cuts till April.
Permian Explorers in the Spotlight
The massive oil price recovery is definitely a boon for all upstream energy companies operating in the prolific shale plays of the United States. However, among all plays, Permian – the most prolific U.S. basin – is likely to witness an uptick in production in April from March, per the U.S. Energy Information Administration (EIA). Per EIA data, Permian will probably produce 4,292 thousand barrels per day of oil in April, higher than March’s production of 4,281 thousand barrels per day. Almost all other resources that include Anadarko, Appalachia, Bakken, Eagle Ford and Niobrara will likely deliver lower oil production in April as compared to March, per EIA.
It is to be noted that despite the rally in crude prices, upstream companies are not opting to increase operating capital budget. Many explorers and producers have decided to keep capital outlays in check, while preserving returns for stockholders. Following poor returns from the energy sector over a long term, investors now prefer companies that are showing discipline about spending capital.
Despite capital discipline of upstream firms, the low cost and high-return Permian is probably among the few plays that are likely to produce more oil in both near and long term since the basin has a huge inventory of low risk and high-return wells.
4 Stocks to Buy
Thus, it seems to be an opportune moment for energy investors to consider stocks of explorers operating in the basin where drillers are gradually returning with an improving crude pricing scenario. Here, we present four Zacks Rank #1 (Strong Buy) stocks that are well positioned to gain. You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Midland, TX, Diamondback Energy, Inc. FANG is a pure-play Permian player with presence in more than 347,000 net acres in the Permian. The company has more than 12,300 gross horizontal locations, brightening its production outlook. Notably, the Zacks #1 Ranked stock is likely to see earnings growth of 112.5% in 2021.
Headquartered in Dallas, TX, Matador Resources Company MTDR has a strong footprint in the liquid-rich Delaware Basin’s Wolfcamp and Bone Spring plays. The Zacks Rank #1 stock is likely to see earnings growth of 300% in 2021.
Pioneer Natural Resources Company PXD, headquartered in Irving, TX, recently announced approval from its board of directors to raise its quarterly cash dividend payout. Importantly, in 2020, the Zacks #2 Ranked company delivered free cashflow of $689 million and the metric will likely improve with the business scenario gradually improving on rising oil prices. Notably, Pioneer projects free cashflow for 2021 at $2 billion. Thus, the upstream energy company, with a strong presence in the Permian, will likely continue to reward investors with dividend payments.
EOG Resources, Inc. EOG, headquartered in Houston, TX, has premium drilling locations in all the prolific shale plays in the United States that include Delaware basin, a sub-basin of the broader Permian. The company, with a Zacks Rank of 1, is likely to see earnings growth of 235% in 2021.
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