Now is the time to invest along the Permian Basin in Texas, oil analyst says
The saying goes, everything’s bigger in Texas — and this includes opportunities to invest in oil, according to one expert analyst.
Some of the best oil companies to consider investing in are based along the Permian Basin of West Texas, the largest U.S. oil patch, Seaport Global Securities Managing Director Mike Kelly told CNBC on Friday.
“It’s simple economics. … You are spending the least amount of capital [along the Permian], but here you get the most reserves on the ground,” Kelly said on “Power Lunch.” “Lower cost wins.”
Along the Permian alone, the oil and gas industry poured more than $28 billion into land acquisitions in 2016, more than triple what was spent in 2015. These deals are setting the stage for much larger investments that will be needed to extract oil from the ground in coming quarters, many experts agree.
In a Thursday note to clients, Seaport wrote that: “Our oil macro review produced a surprisingly robust outlook. … We think uninspiring [full-year 2017] guidance given on [fourth-quarter] conference calls is a case of massive industry wide sandbagging, which sets up a year of beat opportunities.”
While the near-term environment for many oil names is strong, Kelly has warned investors that he remains relatively cautious with his long-term crude outlook, and says gas is looking “decisively worse.”
Yet Kelly told CNBC on Friday he thinks the wild swing of crude prices lately has actually been “encouraging” for the industry and for many of the companies he follows. “In a $50 world, a lot of these guys make a good living. … You don’t need more than $50 for these things to work.”
Oil prices fell Friday, ending a three-day rally and leading into what could be the oil market’s worst quarter since 2015. Investors are worried that growing U.S. supplies are undermining OPEC-led production cuts. Oil settled the day at $50.60 per barrel, falling 5.8 percent.
For investors looking to put money into the space, Seaport’s Kelly said he would recommend three Texas-based oil stocks: RSP Permian, Ring Energy and Callon Petroleum. Ring is a smaller company but one of the fastest growing small-cap stocks in the sector, Kelly said. And Houston-based Callon is one of the fastest growers overall along the Permian Basin, he added.
“We’re back to backing the Permian wholeheartedly,” Seaport wrote in its Thursday note to investors.
— Reuters contributed to this report.