U.S. crude oil prices jumped to their 16-month high on Friday,
ending above $108 a barrel. The surge in the WTI (West Texas
Intermediate) - a benchmark for domestic producers - is likely
driven by the ongoing unrest in Egypt that could destabilize the
resource-rich Middle East and tighten the global supply picture.
The encouraging employment statistics, signaling a strong U.S.
economy, have added to the bullishness.
On top of this, the U.S. Energy Department's weekly inventory
release showed that crude stockpiles fell sharply for the third
time in as many weeks amid consistently climbing refinery runs.
In fact, oil supplies have plunged by a cumulative 27.12 million
barrels since the week ending Jun 21, 2013 - from 394.14 million
barrels to 367.02 million barrels.
The strong rally in WTI prices has pushed it above Brent - the
European counterpart - for the first time since Aug 2010. The
elimination of the so-called 'Brent-WTI spread,' which was as
high as $23 a barrel in Feb and $10 in early Jun, also points to
new/improved pipeline capacity that has allowed the crude glut at
the Cushing oil-storage hub in Oklahoma to be unlocked.
With spot crude price pushing through $100 a barrel, brokerage
analysts are likely to upgrade their forecasts on oil-weighted
companies and related support plays, leading to positive estimate
While all crude-focused stocks - including behemoths like
Exxon Mobil Corp.
) - stand to benefit from rising commodity prices, companies in
the exploration and production (E&P) sector are the best
placed, as they will be able to extract more value for their
Top 3 Crude Oil Plays Right Now
In particular, we suggest exposure to small-cap, undervalued
E&P players like
Matador Resources Co.
Memorial Production Partners L.P.
) that enjoys the benefits of crude oil price leverage, while
sporting a Zacks Rank #1 (Strong Buy).
Dallas TX-based Matador Resources, with current focus on the
high-return Eagle Ford shale formation in South Texas, is
expected to witness earnings growth of 180% in 2013 and 51% in
2014. Moreover, a price-to-book (P/B) ratio of just 1.9 suggests
that the stock is still undervalued.
On the other hand, upstream partnership Memorial Production
Partners possesses a diverse portfolio of mature, long-lived
properties in East Texas / North Louisiana, South Texas and
offshore Southern California. Based on the success of the firm's
acquire-and-exploit policy, analysts are predicting a solid
long-term earnings growth of more than 7%. Moreover, units of
Memorial Production Partners are going for about 12.7x the
estimate for 2013, a 69% discount to the peer group average of
One may also capitalize on this opportunity with the related
business sector of energy equipment service providers. Our top
pick in this space is
). This Zacks Rank #1 (Strong Buy) offshore drilling equipment
maker boasts of highly engineered drilling and production
equipment for deepwater severe-service applications and harsh
Shares of Dril-Quip are going for about 25.2x the estimate for
2013. Though the stock looks a bit pricey, it should not
disappoint investors given the company's long-term expected
earnings growth of 15%.
CHEVRON CORP (CVX): Free Stock Analysis
DRIL-QUIP INC (DRQ): Free Stock Analysis
MEMORIAL PRODUC (MEMP): Free Stock Analysis
MATADOR RESOURC (MTDR): Free Stock Analysis
EXXON MOBIL CRP (XOM): Free Stock Analysis
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