See the article below from Ben Levisohn writing for Barrons online.
It highlights the risk investing in leveraged equity when price is weakening.
Everyone is debating on when we will see the bottom, what the bottom looks like and of course what kind of recovery we can expect. The reality no one really knows for sure because of the vast number of moving parts.
mad2
December 22, 2015, 1:10 P.M. ET12 Oil Stocks for a 2016 Energy Rebound
Email Print
smaller Larger
By Ben LevisohnRBC’s Scott Hanold and team believe so-called quality oil stocks will perform well during the first half of 2016 but that it will be time to buy “beta” in the form of companies like Devon Energy ( DVN), ConocoPhillips ( COP), Rice Energy ( RICE), Continental Resources ( CLR), and Whiting Petroleum ( WLL) during the second half of the year. They explain:
 Spencer Platt/Getty Images
The bifurcation of US E&P stocks is more prevalent now than in recent history. Investors have moved to “safety” and “quality” given the backdrop of both lower oil and natural gas prices. There is a high correlation with lower leverage and stock price performance over the past year. Ownership in the E&P space has become more consolidated with most long only and hedge fund investors focusing on a few names (long side), including Callon Petroleum ( CPE), Concho Resources ( CXO), EOG Resources ( EOG), EQT ( EQT), Matador Resources ( MTDR), PDC Energy ( PDCE), Pioneer Natural Resources ( PXD), RSP Permian( RSPP), Parsley Energy ( PE), Occidental Petroleum ( OXY), Newfield Exploration ( NFX).
Our strategy for 2016 is to stay with “quality” in 1H16 but start to look at beta around mid-year as the commodity markets improve. We are expecting oil prices to stay low in 1H16, but recover in 4Q16 to $60/bbl. We expect global oil market conditions to fundamentally improve over the course of 2016 amid respectable demand growth but with WTI upside to $60/bbl or less. Oil prices are likely to trade in an extremely wide band of $45–60/bbl. A sustainable oil price recovery appears more on the cards in 2017—as longer cycle-time projects begin to lose their steam. We think stocks with lower leverage, good asset quality, and “cheap” valuation are likely to perform the best and earlier: Devon Energy, Apache ( APA), Continental Resources, ConocoPhillips, Carrizo Oil & Gas ( CRZO), EP Energy ( EPE), Gulfport Energy ( GPOR), Newfield Exploration ( NFX),Oasis Petroleum ( OAS), Rice Energy, SM Energy ( SM), Whiting Petroleum.
Shares of Devon Energy have climbed 4.5% to $30.14 at 1:04 p.m. today, while ConocoPhillips has advanced 2.9% to $46.40, Rice Energy has dropped 1.4% to $9.17, Whiting Petroleum has jumped 6.1% to $8.83, and Continental Resources has soared 8.5% to $21.70. |
