Since mid-2014, energy markets have witnessed plunging oil prices amid plentiful supply of the commodity and lackluster global demand. Over time, the commodity has slipped more than half the price it was trading two and half years back. Most of the investors were confused with a million-dollar question that how low could oil go down.

In the midst of such a scenario, oil majors lowered their exploration budgets significantly as the business was not in their favor. Consequently, with lower upstream activities and negligible thirst for new oil, crude discoveries dropped to 70-year low level last year.

So, what’s the reason for last year’s record oil finds?

Lower Capital Spending

The energy market, which has been oversupplied since mid-2014, saw oil prices plunge to all-time lows. Last February, commodity prices nosedived to $26 per barrel. The downturn prompted several analysts to make projections about a potential bottom. While some suggested that prices might drop to $20 per barrel, others came up with estimates of as low as $10 per barrel.

The primary reason for the oil price plunge was the race among major crude producers like OPEC, Russia and U.S. shale producers. In a bid to outpace high-cost producers like the U.S. shale players, OPEC continued to increase production despite the supply glut.

This spelt dooms for exploration and production (E&P) firms as they were unable to sell the commodity at profitable prices. As expected, this led to lesser activities to discover new resources and significant cost cuts. Among major oil companies, Chevron Corporation (CVX Quick QuoteCVX - Free Report) lowered its 2016 exploratory budget by almost 24% to $26.6 billion. Also, ConocoPhillips (COP Quick QuoteCOP - Free Report) slashed its worldwide exploration budget by 22%. 

Growing Number of ‘Dry Hole’

Originally, the term ‘Dry Hole’ was used to specify oil wells that did not contain considerable oil reserves. However, the expression has now come to imply business initiatives that are proven to be fruitless owing to non-commercial oil and gas findings. Last year, several initiatives for exploration were proved futile.

In this regard, a joint initiative between ConocoPhillips, Suncor Energy (SU Quick QuoteSU - Free Report) , and Royal Dutch Shell made last year deserves mention. The initiative, which was developed to get crude from the Shelburne Basin located off the coast of Atlantic, turned out to be unproductive.

The Result: Record Low Discovery

The huge slump in capital budget allocation toward upstream activities along with several fruitless commercial initiatives led to minimal oil discoveries.

Energy research firm Rystad Energy reported that  the discovery of oil and gas across the world – outside of shale plays of North America – slipped to little above 6 billion barrels of oil equivalent (BOE) last year. This is the lowest mark since 1940.

Let’s take a look at last year’s oil findings though discoveries were few and far. In June 2016, Irving, TX-based ExxonMobil Corporation (XOM Quick QuoteXOM - Free Report) – the world’s largest publicly traded oil company – confirmed the finding of world-class oil from a well located off the coast of Guyana. Notably, the offshore well consists of recoverable resources in the range of 800 million BOE to 1.4 billion BOE. The energy major also declared discovery of crude from off the coast of Nigeria, which have resources in the range of 500 million BOE to 1 billion BOE.

Meanwhile, another leading energy firm Royal Dutch Shell plc found oil at Fort Sumter prospect in the Gulf of Mexico, where it discovered more than 125 million BOE of crude. Integrated energy player Statoil ASA also announced two discoveries after it completed the Canadian Atlantic exploration operations during 2016.

Low Discovery Not a Concern

Let’s have a look on global demand side for the time being to get to the apparent concern in details. As per International Energy Agency, the global demand for crude will get to the peak during 2040 which means that worldwide oil demand will go on increasing for few decades.

Hence, if the trend of low oil discoveries follows then it could not fulfill the growing commodity demand. In other words, the ever rising crude demand will likely force the E&P players to explore for new oil.

Which Energy Stocks to Buy?

Overall, the article clearly shows that investors should not turn away from investing on energy stocks. In fact, with prospects for E&P companies looking good both in the near term – following the OPEC and non-OPEC producer’s deal – and in the long term, wise investors might do well to add a few such stocks to their portfolio. With improving oil demand, the commodity price might improve further in the long term that could help the E&P firms to sell oil at lucrative prices.    

Also, increase in E&P activities will result in higher demand for transporting and storage for additional crude output. This bodes well for midstream energy players in the long run.

However, picking the best energy stock is a daunting task. Here we have used the Zacks Stock Screener to zero in on five promising stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) and VGM score of ‘B’ or better. 

VGM score, where V stands for Value, G for Growth and M for Momentum, is a comprehensive tool that allows investors to filter through the standard scoring system and pick winning stocks. Overall, our extensive research says that the combination of a favorable Zacks Rank and favorable VGM score indicates that a stock is capable of outperforming the market.

Our Choices

Incorporated in 1959, Houston, TX-based McDermott International Inc. is an engineering and construction company, which is solely focused on the offshore oil and gas business.

Currently, the company has a Zacks Rank #1 and VGM score of ‘B’. McDermott also outperformed the Zacks categorized Oil Field Mechanical & Equipment industry over the prior three months. During the aforesaid period the company gained more than 45% as against only 4% improvement for the broader industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Diamondback Energy Inc. (FANG Quick QuoteFANG - Free Report) – headquartered in Midland, TX – is an E&P company that carries out its operations on oil resources in the Permian Basin in West Texas.

The company has a VGM score of ‘B’ and a Zacks Rank #2. Diamondback Energy beat the Zacks Consensus Estimate in each of the last four quarters with an average earnings beat of 74.13%.

Based in Dallas, TX, Matador Resources Company (MTDR Quick QuoteMTDR - Free Report) is also an E&P player that operates in the U.S. oil and gas plays.

Matador Resources presently has a Zacks Rank #2 and VGM score of ‘B’. The company also surpassed the Zacks categorized Oil & Gas-U.S Exploration & Production industry in the last three months. During this time frame, shares of Matador Resource gained almost 8% compared with nearly 7% increase registered by for the industry.

W&T Offshore Inc. (WTI Quick QuoteWTI - Free Report) – headquartered in Houston, TX – is involved in E&P operations on patches in the Gulf of Mexico.

The company has Zacks Rank #2 and VGM score of ‘A’. Over the last three month period, W&T Offshore beat the Zacks categorized Oil & Gas-U.S Exploration & Production industry. During the period, the company’s shares gained as much as 99%.

Plains All American Pipeline LP (PAA Quick QuotePAA - Free Report) – headquartered in Houston, TX – is a publicly traded master limited partnership (MLP). It is primarily involved in transportation and storage businesses of oil.

The partnership has a VGM score of ‘A’ and Zacks Rank #2. Over a period of 30 days, the Zacks Consensus Estimate for 2016 has been upgraded to earnings of 98 cents from 78 cents.

Zacks' Top 10 Stocks for 2017

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