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As oil markets rebalance, these drillers may benefit most

Rig supervisor David Crow shows off the oil rig he manages foreElevation Resources at the Permian Basin drilling site in Andrews County, Texas, U.S. in this photo taken May 16, 2016.
Ann Saphir | Reuters

Some analysts are taking a brighter view of some U.S. drillers as consensus grows around the idea that supply and demand in oil markets will balance out sooner than expected.

Crude prices have recovered about 85 percent to roughly $50 a barrel since their winter lows, most recently on supply disruptions amid militant attacks on oil infrastructure in Nigeria, wildfires in Canada and economic crisis in Venezuela.

On Tuesday, the International Energy Agency said it sees oil supply and demand balancing in the second half of 2016, ahead of its prior forecast that they would do so in early 2017. Meanwhile, the IEA now sees oil demand growing more than previously expected in 2016, up 1.3 million barrels per day to a total of 96.1 million bpd for the year.

That followed a report from OPEC on Monday that said the group's current-quarter production is running below the demand it anticipates in the second half of the year, according to Reuters.

In a more-balanced market, daily developments exert a greater effect on crude prices, leading to higher volatility, explained Robert Christensen, senior equity analyst a broker-dealer Drexel Hamilton. For now, he said he believes those moves are biased to the upside.

Oil prices have slid for four straight days amid fear that Britons will vote to leave the European Union next week. But Christensen said investors are putting too much emphasis on that near-term event, especially given the supply-demand fundamentals highlighted by IEA.

Christensen on Tuesday advised picking up shares of some Permian Basin drillers that he believes can raise production profitably. The Permian is located beneath Texas and New Mexico.

To be sure, some market watchers believe another price collapse will ensue if U.S. drillers desperate for revenue turn on the tap too soon. But Christensen said many producers in North Dakota's more mature Bakken oil fields won't tap new production until they assess how increased drilling in Texas and New Mexico's Permian affects oil prices.

Latecomers to the Bakken "remain challenged. I don't think it's going to be a uniform redeployment," he told CNBC.

Christensen said he sees Pioneer Natural Resources as the best large-cap momentum driller, citing its dominant status in the Permian's Midland Basin, which has some of the lowest break-even drilling costs in the country.

The Irving, Texas-based driller has said it could add five to 10 rigs if oil stays above $50 a barrel and supply-demand fundamentals improve. That could help Pioneer increase oil production by up to 30 percent this year, according to Christensen.

The consensus price target on shares of Pioneer is about $187, roughly 15 percent above their Tuesday close, according to FactSet data.

WPX Energy is Drexel Hamilton's top small-cap momentum name. The company is well-positioned in the Permian Delaware, aims to raise $485 million in equity markets and could generate a 20 percent bump in output this year, Christensen said.

Christensen is also bullish on Anadarko Petroleum and QEP Resources, but said they likely need prices to rebound to $55 or $60 a barrel if they want to profitably add production.

On Monday, Morgan Stanley upgraded some exploration and production stocks on the view that pent-up demand among investors for a buying opportunity in the energy sector and an ultimate oil price recovery will offset an anticipated pullback as gains driven by supply disruptions fade.

"We continue to believe the longer-term recovery is the bigger and higher conviction event in a lower conviction world, and we would add risk, yet not go 'all-in' here," Morgan Stanley said.

The firm raised its price target on Concho Resources to $173. The Delaware and Midlands basins player can deliver 25 to 30 percent growth when the oil recovery crystallizes in 2018, and has a "best-in-class hedge portfolio" that protects it against a possible downturn in the interim.

Canadian driller Cenovus Energy was also upgraded to "overweight" by Morgan Stanley. In a higher oil price world, Cenovus' cash pile will allow it to drive growth more quickly than its Canadian peers, the firm said. Morgan Stanley's price target of 26 Canadian dollars ($20) implies 38 percent upside for the Toronto-traded shares of Cenovus.

Morgan Stanley reiterated its positive view on Pioneer, Devon Energy, Continental Resources and Cimarex Energy.