Markets

Energy stocks are having their best day of the year — here are Wall Street's best buys from here

Key Points
  • The S&P Oil & Gas Production ETF is on pace for its best day of the year, while the S&P energy sector is set to move out of bear market levels.
  • The rally in the energy sector is led by small- and mid-cap explorers that are heavily shorted, according to Citi analyst Scott Gruber.
  • Investors looking to play the boost from higher oil prices should focus on those with limited oil hedges and a high percentage of oil production, said Goldman Sachs' energy analyst Brian Singer.
  • Goldman highlighted Brigham Minerals, Murphy Oil and Continental Resources.
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Energy stocks, one of the worst-performing sectors this year, spiked on Monday after an attack on Saudi Arabia's heart of oil production Saturday sent oil prices soaring.

The S&P Oil & Gas Production ETF jumped nearly 11%, posting its best day of the year, while the S&P energy sector moved out of bear market levels and also scored its best session of 2019.

An oil processing facility at Abqaiq and the nearby Khurais oil field was attacked on Saturday, knocking out 5.7 million barrels of daily crude production or more than 50% of the kingdom's global daily exports. The disruption drove Brent crude oil up as much as 19%, its biggest intraday jump in history.

Exploration & production stocks

The rally in the energy sector is led by small- and mid-cap explorers that are heavily shorted, according to Citi analyst Scott Gruber. These stocks include Extraction Oil & Gas and Whiting Petroleum, which soared 28% and 49% respectively.

Oil explorers are typically a riskier segment in the energy sector given their growing pile of debt. Investors looking to play the boost from higher oil prices should focus on those with limited oil hedges and high percentage of oil production, said Goldman Sachs energy analyst Brian Singer.

Explorers with those characteristics and also rated buy by Goldman include Brigham Minerals, Murphy Oil and Continental Resources, Singer said.

Offshore drillers

The soaring oil prices are also good news for offshore oil drilling companies. Transocean, Valaris and Diamond Offshore Drilling are all climbing more than 10% on Monday as these heavily shorted stocks experienced "a large short cover bounce," Gruber said.

"Long cycle offshore activity should see less of an impact unless the outages/geopolitical risk premium sustains for an extended period while structural oversupply likely remains," Gruber said. "Thus the bounce in the offshore drillers could fade before other sub-sectors."

Goldman highlighted Kosmos Energy among drillers as it's already "well positioned" with a possible asset sale by year-end before the positive impact from higher oil prices, Singer said. Kosmos Energy is up more than 9% Monday.

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Oil majors

For oil majors, Goldman expects ConocoPhillips to have the biggest upside from the Saudi oil disruption in light of its underperformance against its peers this year. The stock is up 9% on Monday.

"We also see a positive set up into the company's November analyst day given robust free cash flow at a lower crude environment," Singer said.

Canadian oil companies will also benefit, Singer added. Canadian Natural Resources may have "disproportionate stock reactions" given its elevated leverage, he noted. Its stock jumped 12% Monday.

Refiners

Refiners took a hit from the Saudi attack as many U.S. facilities depend on heavy crude supplied by countries including Saudi Arabia.

PBF Energy and Valero Energy, which dropped 9% and 3.6%, respectively, are among refiners which import Saudi crude, Singer said.

"For refiners, duration of Saudi production outages will be the key to assessing the extent of the financial impact," Singer said. "Inland refiners should be more protected in the near-term from any crude disruption given they source more barrels domestically.