Energy stocks fell hard as crude oil prices tumbled to 18-month lows to close 2018, and BofA Merrill Lynch’s Doug Leggate thinks some are clearly undervalued, saying “on any reasonable measure U.S. oils are severely oversold, resetting absolute and relative opportunities across the sector in 2019.”
Individual stock performance will become “increasingly differentiated by how exploration and production [companies] strike a balance between growth, leverage and shareholder returns while challenging management to take greater responsibility for growth above what the market can absorb,” Leggate writes.
Exxon Mobil (XOM +3.5%) is Leggate’s top pick among the oil majors, while Occidental Petroleum (OXY +3.2%) and Anadarko Petroleum (APC +4.6%) are his favorite yield plays, and BAML upgrades Chevron (CVX +1.5%), EOG Resources (EOG +3.4%) and California Resources (CRC +10%) to Buy from Neutral, believing they would benefit from an oil recovery.
Leggate also sees Hess (HES +7.4%) and Noble Energy (NBL +6.9%) as the sector’s best values, although Marathon Oil (MRO +4.6%) and Cimarex Energy (XEC +3.5%) also stand out.
But the analyst downgrades ConocoPhillips (COP +2.1%), EOG Resources (EOG +3.4%) and PDC Energy (PDCE +6.2%) to Neutral from Buy, and cuts Centennial Resource (CDEV +5.1%), Chesapeake Energy (CHK +7.7%), Halcon Resources (HK +5.3%), Range Resources (RRC +7%) and Southwestern Energy (SWN +6.3%) to Underperform from Neutral.