West Texas' prolific Permian Basin will be bustling with activity in 2017, but Canaccord Genuity says there is growth potential through 2018, leading the firm to believe the "Permian names are underratedly cheap."
It is clear to see that this is the area to be in for domestic oil and gas companies from the Baker Hughes' (BHI) weekly rig count report. As of Jan. 6, the Permian Basin had 267 rigs online, easily surpassing every major basin. Eagle Ford followed the Permian with only 47 rigs. Many players have been flocking to the lucrative basin throughout the past year and have been actively acquiring more acreage, such as Parsley Energy (PE - Get Report) did earlier this week.
Even though at current strip prices, excluding hedges, the EV/EBITDA multiple is 12.5x, which is nominally high by historical exploration and production standards, Canaccord analyst Sam Burwell says there an aspect going unrecognized. (EV/EBITDA is a common valuation multiple used to measure the value of a company.)
"What we believe is somewhat underappreciated, however, is the degree of the multiple compression into 2018 drive by organic production growth," Burwell wrote.
With this in mind, Burwell prefers small- and mid-cap names in the space.
"Growth trajectories and capital efficiencies are generally stronger in the small- and mid-caps compared to the large caps," the analyst wrote in a research note on Thursday.
"Each [of these stocks] has operational catalysts on the horizon which could add upside to net asset value and each has the balance sheet strength that should enable high levels of growth in 2017 and 2018," Burwell said. He also notes that all three companies have the means to make additional acquisitions.