4 Soaring Energy Stocks That Are Still Good Buys

Energy stocks have been dead money over the past 18 months, brutalized by the slide in oil prices. Most stocks have slipped big time – 40% or more – as the commodity has collapsed and industry profit margins have sagged.

Oil’s Descent

In June 2014, West Texas Intermediate (WTI) crude futures were trading above $110 per barrel. Now it’s around $35 per barrel.

Oil is facing the heat on several fronts. Perhaps most important pertains to the mounting worries about China’s crude demand. In particular, the Asian giant’s currency devaluation has stoked speculation about soft economic growth in the world’s No. 2 energy consumer. 

The absence of production cuts from OPEC, the resilience of North American shale suppliers to keep pumping despite crashing prices, and a weak European economy, have all added to the bearishness. The influx of Iranian crude has put the final nail in the coffin.

Recovery in the Offing?

West Texas Intermediate (WTI) crude futures are currently up around 40% from the 12-year low of $26.21 reached in Feb. While record high inventories and robust production could still push the commodity to the depths of multiyear lows again, signs are emerging that oil prices are likely to stabilize and gradually pick up.

Not only is global demand expanding but energy companies have significantly scaled back on plans to explore for and bring out more oil. This should lead to lower future production. The price sentiment should improve further if major producers can hammer out an accord to control volumes.  

Rig Count Relief

Oil services firm Baker Hughes Inc. (BHI - Analyst Report) said in its weekly rig count that U.S. oil producers idled six more rigs over the past week, bringing the total to 386. This marks its 12th consecutive weekly decline. The oil rig count is now down 76% from a peak set in Oct 2014 and is now at its lowest level since 2009.

Industry observers view the rig count data as an indicating a break in shale drilling activities in the world’s biggest oil consumer.

Supportive for Stocks

Over the past week, ‘The Energy Select Sector SPDR’ posted a jump of 11.85%. The broad-based Dow Jones Industrial Average and the S&P 500 index gained just 6.51% and 6.35%, respectively, over the same period. Most major oil stocks – including mega-caps Chevron Corp. (CVX - Analyst Report), Anadarko Petroleum Corp. (APC - Analyst Report) and ConocoPhillips (COP - Analyst Report) – relocated in the green with gains of 11%, 20% and 22%, respectively.

Looking for Solid Energy Ideas?

After being under the pump for the most part of two years, crude prices have only started recovering. This might prompt investors to build or increase their position in oil-related companies. However, selecting stocks to buy could be a tricky proposition, especially with oil prices moving like a roller-coaster.

However, with the help of our Zacks Stock Screener, one can locate stocks with green shoots. In particular, we have shortlisted 4 companies that have gone up an impressive 25% or more over the past 4 weeks, and have a Zacks Rank #2 (Buy).

Kosmos Energy Ltd. (KOS - Snapshot Report): Kosmos Energy is a leading independent oil and gas exploration and production company focusing on frontier and emerging areas along the Atlantic Margin. Up 44% during the past 4 weeks, the Hamilton, Bermuda-based firm boasts of some high-margin assets in Ghana, Mauritania and Senegal. An active exploration program, strong balance sheet and attractive hedge position are other positives in the Kosmos Energy story.

McDermott International Inc. (MDR - Analyst Report): Despite the weak commodity pricing environment, McDermott International has maintained its excellent track record of earnings surprise history, beating estimates handily in each of the last 4 quarters. This leading global energy-focused engineering and construction firm – which surged 62% last month – has embarked on a major cost savings initiative to shore up its finances and turn around.

Though some investors might be worried about the company's immediate future due to the cyclical downturn across the markets it serve, we believe McDermott's broad product portfolio and large order backlog insulates the operations to a large extent.

Matador Resources Co. (MTDR - Snapshot Report): Matador Resources is an independent exploration and production company engaged in the acquisition, finding, and development of unconventional onshore oil and gas properties. The company recently reported upbeat fourth quarter results on strong production and is up 29% over the past 30 days. Its operations are concentrated primarily in the Eagle Ford in South Texas, and Permian Basin in Southeast New Mexico and West Texas.

With a multi-year drilling inventory located in some of the industry’s best plays, balanced oil/gas portfolio and accretive acquisitions, Matador Resources’ asset portfolio is primed for high production growth and peer-leading returns.

Rice Energy Inc. (RICE - Snapshot Report): Canonsburg, PA-based Rice Energy is an independent exploration and production company engaged in the acquisition, finding and development of oil and gas properties. The company, which jumped 37% in last 4 week’s trading, primarily operates in the Appalachian Basin. Rice Energy has surprised earnings to the upside in each of the last three quarters. The company’s strong balance sheet, expanding midstream footprint and lower cost structure more than offsets the lower realizations.

Bottom Line

While these stocks may be breaking out, they still hold the potential to make investors standout gains in these capricious times.