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Crude Oil Back Above $65: Buy These 5 Top Ranked E&P Stocks

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Following the release of EIA crude inventory numbers, renewed geopolitical tensions in the Middle East and Fed announcement on interest rates, oil prices jumped above the psychologically important $65 per barrel level on Wednesday. West Texas Intermediate crude for May delivery gained $1.63, or 2.6%, to settle at $65.17 a barrel in electronic trading yesterday - the highest since early February.

Bullish EIA News

The federal government’s EIA report revealed that crude inventories fell by 2.6 million barrels for the week ending Mar 16, following an increase of 5 million barrels in the previous week. The analysts surveyed by S&P Global Platts – the leading independent commodities and energy data provider – had expected crude stocks to go up.

An uptick in refinery demand and lower imports led to the surprise stockpile draw with the world's biggest oil consumer even as U.S. output edged up 26,000 barrels per day last week to 10.4 million barrels per day, the most since the EIA started maintaining weekly data in 1983.

Stockpiles have shrunk in 36 of the last 50 weeks and are down more than 105 million barrels since April last year. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 428.3 million barrels, current crude supplies are 19.7% below the year-ago period and are in the bottom half of the average range during this time of the year.

Middle East Tensions, Venezuela and the Fed

Apart from the bullish government data, oil prices were also supported by growing concerns over tensions between major crude producers Iran and Saudi Arabia. There is widespread speculation that Saudi Arabia’s Crown Prince Mohammed bin Salman's ongoing state visit to Washington is aimed at ramping up pressure to reimpose sanctions on Iran. As it is, last week’s removal of Rex Tillerson as secretary of state raises questions over the future of the Iran nuclear deal. There are indications that the 'more hawkish' Mike Pompeo might lead America's exit from the Iran pact if the European allies do not agree to toughen the terms by May 12. This has injected uncertainty into the oil market by threatening the flow of the Gulf country’s swelling crude exports.

Fast falling production in Venezuela have added to the jitters. With the country tethering on the verge of an economic collapse, oil output has dwindled by almost 50% since 2005. Venezuela currently churns out less than 2 million barrels per day, much lower that its pledge per the OPEC-led supply cuts.

Finally, oil prices were also supported by the Federal Reserve’s decision to raise interest rates. As widely expected, the U.S. central bank opted to hike the benchmark lending rate a quarter-point to between 1.5% and 1.75%. This led to dollar weakness that made the greenback-priced crude more affordable for investors holding foreign currency.

Supportive for Stocks

The federal data sparked widespread buying in energy stocks, which pushed the Energy Select Sector SPDR – an assortment of the largest U.S. energy companies – up more than 2.6% Wednesday. The two energy representatives in the 30-stock Dow Jones industrial average, Exxon Mobil (XOM - Free Report) and Chevron (CVX - Free Report) added 1.4% and 2.2%, respectively. Meanwhile, some of the biggest gainers of the S&P 500 were also oil and oil-related stocks.

An Opportunity to Build a Position in Energy

A steady drawdown of U.S. supplies, healthy demand and ongoing OPEC-led production cuts have driven oil prices higher. Crude has been inching its way back up after falling sharply from $100 a barrel in 2014, to a low of $30 in 2016. The robust fundamental backdrop, which we expect to further strengthen over the course of this year, has brought life back into the sector.

Oil’s recovery to $65, predictably, has had a positive effect on stocks in the sector while positioning certain producers to thrive. During the three-year downturn, oil companies worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques. With these efforts, many upstream companies have repositioned themselves to adapt to the new $50-$60 oil reality.

High Quality E&P Names Leading the Way

While all crude-focused stocks stand to gain from the oil rally, companies in the exploration and production (E&P) sector are the best placed, as they will be able to extract more value for their products.

Moreover, the firms boast conservative balance sheets with enough cash on hand and manageable leverage. This provides them ample flexibility to make acquisitions or grow internally. Moreover, driven by operational efficiencies, these entities have been able to reduce unit costs -- an impressive achievement amid the tight realization scenario.

To guide investors to the right picks, we highlight 5 stocks that carry a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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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 (Buy)offer the best upside potential.

Our Choices

First on our list is Concho Resources Inc. (CXO - Free Report) . It is an independent oil and gas exploration and production company with producing properties mainly in the Permian Basin of southeast New Mexico and west Texas. Concho Resources, based in Midland, TX, sports a VGM Score of B.

Continental Resources, Inc. (CLR - Free Report) is our next pick. An oil explorer and producer with primary focus in North Dakota’s Bakken play, Oklahoma City, OK-based Continental Resources has a VGM Score of B.

Then we have Northern Oil and Gas, Inc. (NOG - Free Report) . It is a non-operator explorer and producer with primary focus on the Williston Basin in North Dakota and Montana. Northern Oil and Gas – headquartered in Minnetonka, MN –– has a VGM Score of A.

Our fourth choice is Houston, TX-based WildHorse Resource Development Corp. (WRD - Free Report) - a company focused on the acquisition, development, exploration and operation of unconventional, onshore oil and gas properties in the northeastern end of the Eagle Ford Play in South Texas. This company flaunts a VGM Score of B.

Finally, there is Bonanza Creek Energy Inc. (BCEI - Free Report) . Established in 2006, Denver, CO-based Bonanza Creek Energy is an independent exploration and production company with core operations in the in the Rocky Mountain and Mid-Continent regions. This company sports a VGM Score of B.

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