Why Analysts Rate WPX Energy a ‘Strong Buy’

Analyst recommendations

WPX Energy (WPX), a Permian- and Williston-focused E&P (exploration and production) company, is in fourth place in terms of analysts’ ratings among upstream companies. About 96% of analysts surveyed by Reuters rate WPX a “buy,” and the remaining 4% rate it a “hold” as of September 4. Goldman Sachs last downgraded WPX to “neutral,” which is equivalent to a “hold.”

Why Analysts Rate WPX Energy a ‘Strong Buy’

WPX Energy saw several target price upgrades following its second-quarter earnings announcement. The increase in 2018 production guidance could be one factor behind the upward revision in its target price. WPX’s average target price of $24.40 implies a ~35% upside potential from its current price.

Similar to other E&P players, WPX is expected to experience strong production growth in the Permian Basin and Williston Basin. However, unlike its peers, it doesn’t see any impact of the rise in Midland differentials on its 2019 earnings. According to WPX’s recent investor presentation, its peers are expected to see an average EBITDA impact of 9% and 15% assuming $15 per barrel and $20 per barrel price differentials, respectively.

According to Rick Muncrief, WPX’s CEO, “We’re reaping some of the best basis differentials in the Permian Basin among our peers. We expect this to continue over the next couple of years, which is an outcome of our pro-active midstream and marketing strategy.”

Outlook

The company is expected to experience a strong ~89% and ~61% CFFO (cash flow from operation) growth in 2018 and 2019, respectively. That could be attributed to analysts’ strong bullishness for WPX. However, the company’s high leverage and high valuation could be a slight concern. WPX was trading at a price-to-CFFO ratio of 7.8x as of September 4, which is higher than the industry median of 5.4x.

In the next part, we’ll look at analysts’ ratings for Diamondback Energy (FANG).