Focus: the balance of risk in U.S. large cap energy names has shifted relative to weaker crude oil pricing. Bank of America cut its oil price outlook on Wednesday as a result of global economic risks, but still offered some energy stock plays that may hold up amid continued economic deterioration and could contain value in an upturn. "As contagion spreads from banking woes to economic growth expectations, oil prices are falling rapidly. In addition to weakening demand in Europe, growth in
Focus: energy stock short squeeze Comstock Resources ( CRK), Magnum Hunter Resources ( MHR), EXCO Resources ( XCO), Petroquest Energy ( PQ) and Bill Barrett ( BBG) are all natural gas-tied stocks that could rise on a short squeeze, notes Sifel analyst Amir Arif in a June 6 note. "Non-commercial net short positions have been reducing in nat gas despite the recent drop in nat gas prices," writes Arif. A possible short squeeze lines up with Stifel's belief that while natural gas is still oversupplied relative to the firm's outlook on supply and demand, it is less so, potentially benefiting commodity prices. "The storage constraints this fall should provide a damper on natural gas and a good entry point at sometime between 2Q earnings and the fall." Other stocks that could benefit from declining natural gas inventories and a sector short squeeze include Southwestern Energy and Cabot Oil & Gas ( COG). 3. Guggenheim Securities
Focus: independent E&Ps In a Tuesday note to clients, Guggenheim Securities analyst Rob Cordray highlights Anadarko Petroleum and Noble Energy ( NBL) as top picks across the exploration and production sector, while Devon Energy ( DVN) still stands to benefit from the shift it made from deepwater oil to unconventional drilling assets after selling its Gulf of Mexico holdings to BP more than two years ago. Nevertheless, Cordray sees Devon Energy's Canadian assets as particularly exposed to oil price volatility.
Focus: finding the "go-to" natural gas stock, with a liquids tilt For natural gas stock investors who expect a recovery in gas prices from near-decade lows but are weary of the murky outlook for Chesapeake Energy ( CHK), Credit Suisse analyst Arun Jayaram suggests that Southwestern Energy ( SWN) is a "go-to" stock when natural gas prices turn because of its strong balance sheet and its existing base of production in the Fayetteville and Marcellus shale's. Jayaram, who upgraded Southwestern Energy from underperform to neutral on Wednesday concedes that the company is already richly valued compared to some embattled peers; however, he expects shale assets to support 8% production growth through 2015 amid a long-term rebound in gas prices. "Recent sharp declines in conventional activity and more permanent shifts in producer economics that favor liquids plays could bring about a faster reset in the gas market than implied by the gas futures strip," notes Jayaram, who boosted his price target for Southwestern Energy to $29 from $25. For those who want to play the energy sector but are weary of direct exposure to commodity prices, Credit Suisse's recent addition of Pennsylvania-based utility PPL Corporation ( PPL) in its "Better than Bonds" portfolio may prove to be a defensive energy play worth watching. The basket was created in 2010 with the premise that bond investors may move into low-beta, high-yield stocks given low returns on Treasuries. Previously, Credit Suisse held Con Ed ( ED) in the portfolio. 5. Deutsche Bank
Focus: natural gas stocks as a defensive trade As drillers like Southwestern catch the interest of some, Carl Icahn's recent activist investment in Chesapeake Energy has boosted the natural gas sector's biggest 2012 stock story. In Wednesday trading, Chesapeake Energy rose over 5% on Bloomberg reports that the company is considering selling its minority stake in its Chesapeake Midstream Partners ( CHKM) pipeline unit for $4 billion. Now some are targeting natural gas producers as a way to defend against the possibility negative macroeconomic data continues to hit energy prices. "We see the recent outperformance of natural gas stocks as a defensive trade within the group (vs. downside risks to oil)," writes Deutsche Bank oil and gas equity analyst Stephen Richardson in a Wednesday note to clients. Still, Richardson concedes its a risky proposition. "While we see tighter balances in 2013
Focus: big exposure to the "shale promise" stocks At a conference last week, ITG Investment Research highlighted that a backlog of undrilled shale gas wells, productivity gains in unconventional drilling and the release of associated natural gas from oil drilling rigs is causing a "shadow inventory" equal to roughly 8% of total U.S. natural gas production. Still, the firm notes Pioneer Natural Resources ( PXD), EOG Resources ( EOG), El Paso ( EP), Approach Resources ( AREX) and Laredo Petroleum ( LPI) as horizontal drillers with the biggest exposure to promising shale's in the Midland Basin. 7. Sterne Agee
Focus: natural gas hedging strategies as the best defensive plays Sterne Agee analyst Tim Rezven highlights Pioneer Resources and Energen ( EGN) as two gas drillers with gas hedging contracts that could limit their earnings downside were commodity prices to fall. "We believe they are attractive defensive holdings for investors seeking exposure to the industry who remain bearish on the outlook for commodity prices, despite the recent pullback in oil prices," he writes in a June 1 report that gives both companies buy ratings. 8. Dahlman Rose
Focus: oil service stocks have to bottom out at some point, and that point is approaching For those trying to catch a drilling boom instead of an oil or gas commodity price surge, Dahlman Rose analyst James Crandall notes that oil service company stock prices may be approaching "trough valuations" after a 33% drop in the Oil Service Sector Index ( OSX) since March 2011. Crandall highlights Baker Hughes ( BHI), Haliburton ( HAL), National Oilwell Varco ( NOV) and Weatherford ( WFT) as large cap oil service companies that are attractively valued. For more on oil and gas M&A, see 5 energy deals not to be forgotten in 2012 and Chesapeake Energy's flurry of asset sales. -- Written by Antoine Gara in New York