Several prominent energy stocks are teetering on the precipice of the dreaded "death cross" trading pattern, potentially heralding another big down leg in the minds of many traders. The death cross is widely considered a bearish crossover wherein the 50-day moving average of an underlying asset moves below the longer-term 200-day moving average.
Despite its ominous name, the death cross does not necessarily portend that the skies are about to fall; rather, it frequently precedes a near-term rebound with above-average returns. Indeed, the rise of the 50-day moving average above the 200-day moving average often signals the exhaustion of downward market momentum. And, there is no shortage of severely distressed stocks in the energy sector--the only sector that failed to muster any gains in the red-hot month of November.
And now a cross-section of Wall Street is urging investors to return to oil, saying the long-awaited oil price rebound could be nigh. Here are our top-ranked oversold oil and gas stocks.
Exxon Mobil Corp.
Market Cap: $398.2B
YTD Returns: -7.6%
Relative Strength Index (RSI): 24.9
After enjoying a bumper season over the past couple of years amid soaring oil prices, America's largest oil and gas company, Exxon Mobil Corp. (NYSE:XOM) has lately fallen out of investors' good books with the stock's RSI reading of 24.9 indicating XOM is deep into oversold territory (A stock is considered to be oversold if the RSI reading falls below 30 and overbought if it exceeds 70).
That's far lower than energy stocks covered by Energy Stock Channel, with an average RSI of 48.2, and even worse than the RSI of WTI Crude Oil at 31.5. XOM's 52-week high is $120.70, while the low point was $98.02 per share, within touching distance of the current price of $98.44. Related: Oil Traders Turn Bears Fast and Furiously
As the most visible oil and gas mega cap, XOM stock has been badly hit by falling oil prices and growing worries about future oil demand. Exxon has positioned itself for organic and inorganic growth in the coming years. In October, it announced the takeover of fellow shale operator Pioneer Natural Resources (NYSE:PXD) in a giant $60B deal, marking Exxon's largest M&A deal since its purchase of Mobil in 1999.
Pioneer is the second-largest producer in the Permian Basin by oil production, meaning a merger with Exxon makes the latter the largest producer in the Permian with production potential of ~1.2 million boe/day, overtaking current leader Occidental Petroleum (NYSE:OXY). A few months prior, Exxon announced that it had agreed to buy Denbury Resources (NYSE:DEN) for almost $5 billion in an all-stock deal.
When it comes to organic growth, ExxonMobil Corp. (NYSE:XOM) and about a dozen other companies are working round the clock to develop offshore Guyana-Suriname Basin, one of the hottest, if not the hottest, new oilfields in the world today. The Guyana basin, off the northeast coast of South America, is poised to significantly impact the world oil markets if ExxonMobil's projection of almost 11 billion barrels of oil in a single section of the basin pans out. Yellowtail, the basin's fourth and largest world-class development project, is expected to begin production in 2025, targeting 250,000 bpd.
Occidental Petroleum
Market Cap: $50.1B
YTD Returns: -9.0%
Relative Strength Index: 19.2
Occidental Petroleum (NYSE:OXY) is another large-cap energy stock that cannot seem to get much Wall Street love. Its lowly RSI reading indicates the stock is extremely oversold. Following in the footsteps of its more prominent peer, Occidental Petroleum has lately jumped into the M&A bandwagon after being linked with the acquisition of Permian Basin oil producer CrownRock in a deal that could potentially exceed $10B.
According to the Wall Street Journal's Jinjoo Lee, assuming an $11B price tag, a deal for CrownRock would imply a value of at least $73K per flowing boe/day, which "looks steep compared with other moderately sized Permian deals inked this year." Lee notes that Ovintiv Inc. (NYSE:OVV) agreed to pay ~$65K per boe/day for Permian assets from Encap, while Civitas Resources' (NYSE:CIVI) Permian deal this year implied a $47K per boe/day valuation. Lee has argued that even though Exxon is paying $91K boe/day for Pioneer Natural Resources, the company is arguably paying a premium for Pioneer's vast undeveloped acreage.
Thankfully, OXY and Devon Corp.(NYSE:DVN) recently received a nod from Morgan Stanley, with both upgraded to Overweight from a previous investment rating of Equal weight.
"We see opportunities to add exposure to high-quality stocks at attractive valuations, but also remain selective. We see an improved risk-reward post the recent pullback in crude and Morgan Stanley economists have an above-consensus view on 2024 growth," Devin McDermott, analyst at Morgan Stanley, said in a December 11 report.
Diamondback Energy Inc.
Market Cap: $26.8B
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YTD Returns: +15.7%
Relative Strength Index: 27.8
With an RSI reading below 30, Diamondback Energy Inc. (NASDAQ:FANG) is yet another unloved Permian producer. Diamondback Energy is another company linked with the CrownRock acquisition: the company discussed its M&A prospects in its most recent conference call and has been active in consolidating within the northern Midland. Earlier in the year, Diamondback Energy entered a deal to acquire all leasehold interest and related assets of FireBird Energy LLC for $775 million in cash and 5.86 million Diamondback shares, with the deal valued at $1.6 billion.
"This bolt-on acquisition adds significant, high-quality inventory right in our backyard. With over 350 locations adjacent to our current Midland Basin position, this asset adds more than a decade of inventory at our anticipated development pace, including inventory that competes for capital right away in Diamondback's current development plan," said Diamondback CEO Travis Stice.
But the reverse could also happen, with Diamondback Energy becoming an M&A target itself thanks to its attractive valuation and high-yield assets in the Permian.
By Alex Kimani for Oilprice.com
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