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Oil prices posted their second straight monthly gain Friday as investors were impressed by a decision from the world's largest oil cartel to slash production targets.

The Organization of Petroleum Exporting Countries (OPEC), whose member nations supplies around 40% of the world's crude, said it would cut production by as much as 750,000 barrels a day starting in November in order to keep oil prices from falling further. Most industry observers didn’t have high expectations from the meeting.

Following the surprise move, U.S. crude futures gained 8% on the week and the month. On Friday, the commodity settled up $0.41 to $48.24 a barrel in New York.

OPEC’s First Reduction in 8 Years

OPEC's decision to cut oil production – made in a meeting in Algiers on Wednesday, Sep 28 – took most analysts by surprise. The move, led by Saudi Arabia, aims to trim output to 32.5-33.0 million barrels per day from the current 33.5 million barrels per day.

Crude prices, which reached $110 per barrel in mid-2014, fell to a 12-year low of $26.21 in Feb on a supply glut amid slowing demand. In particular, the oil rout alarmed many of the countries whose economies depend on the commodity’s exports.

A sop to populous big-spending oil producers such as Venezuela and Iran, the cartel’s cutbacks was a mild loss for Saudi Arabia that has been adamant about its continuing strategy to preserve market by pumping oil almost flat-out rather than trying to prop up prices by modifying production limits.

Riyadh was forced to soften its stand after it became clear that the kingdom was getting clobbered by its own policies. As a result, the world’s largest crude exporter gave its seal of approval on the cartel’s production cut decision – the first such attempt since 2008. What’s more, Saudi Arabia will bear the lion’s share of the production cuts to accommodate arch rivals Iran’s demands.

A Buy Signal for Stocks?

While analysts remain deeply skeptical that the output curb would be carried through, the early reaction in energy stocks has been positive. Oil prices have jumped around 10% since the members’ meeting in Algeria, and should the ministers agree on production levels in Nov, even higher prices are a likely outcome. Though it might be several months before the specifics are worked out, it might be a great idea to start shopping for companies now that will benefit once the OPEC nations come to agreement on the deal’s implementation.

The Zacks Edge

Some investors might point to the vagaries of trading around OPEC statements, especially considering the scarce details and the body’s not-so-good track record of keeping its words.

However, with the help of our Zacks Stock Screener, one can locate stocks with green shoots. In particular, we have shortlisted 5 companies that have gone up an impressive 25% or more over the past 3 months (or the Jul-Sep quarter), and have a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

During the third quarter, the S&P 500 energy sector – represented by the ‘Energy Select Sector SPDR ETF (XLE - ETF report) – posted a gain of 3.55%. The broad-based Dow Jones Industrial Average and the S&P 500 index gained just 2.00% and 3.11%, respectively, over the same period.

Finally, the chosen ones have VGM Score less than or equal to B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 offer the best upside potential.

5 Stocks to Invest In

Evolution Petroleum Corp. (EPM - Snapshot Report) : Formed in Sep 2003, Evolution Petroleum is a Houston, TX based exploration and production company that develops reserves through the application of conventional and specialized technology to domestic onshore oil and gas resources.

Zacks Rank: #1

VGM Score: ‘A’

% Price Change (12 Weeks): +15.23%

Ultra Petroleum Corp. (UPLMQ - Analyst Report) : Houston, Texas-based Ultra Petroleum is an independent energy firm engaged in the acquisition, development, exploration and production of oil and gas properties. The company’s operations are focused on the Green River Basin of southwest Wyoming, mainly covering the Pinedale and the Jonah fields.

Zacks Rank: #1

VGM Score: ‘B’

% Price Change (12 Weeks): +192.92%

Repsol S.A. – ADR (REPYY - Snapshot Report) : Repsol is Spain’s largest energy company, which is engaged in oil and gas exploration and production, refining and marketing of petroleum products, and other energy-related businesses.

Zacks Rank: #2

VGM Score: ‘B’

% Price Change (12 Weeks): +9.54%

Tullow Oil plc (TUWOY - Snapshot Report) : Headquartered in London, U.K., Tullow Oil is a European upstream player with main focus on Africa - Ghana, Uganda and Kenya. Additionally, the company holds licenses in the North Sea and South America.

Zacks Rank: #2

VGM Score: ‘B’

% Price Change (12 Weeks): +20.15%

Premier Oil plc (PMOIY - Snapshot Report) :One of the oldest exploration and production companies in Europe, Premier Oil has assets spread over Africa, Brazil, Falkland Islands, Pakistan, Southeast Asia and the North Sea.

Zacks Rank: #2

VGM Score: ‘B’

% Price Change (12 Weeks): +8.84%

Bottom Line

With energy prices picking up steam, this is the perfect time to indulge in these stocks to make sure your portfolio is perfectly oiled up! While we keep our fingers crossed for a profitable fourth quarter, let these hot bets with their strong ranks and price momentum spell magical returns for you.

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