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Energy Favorites from Canaccord to Buy Now


Andarko, EOG, and Cabot are among the E&P picks.

Motivated by the price relationship between crude oil and natural gas/NGLs, the exporation & production (E&P) industry continues to aggressively allocate capital away from gas-directed activity, and more recently NGL-oriented drilling, in favor of higher margin oil development.

Below Canaccord Genuity energy analyst John Gerdes listes his top exploration and production picks (in order of market capitalization). All are a "Buy" according to the analyst.

Anadarko Petroleum (APC): Upside to our target price includes deepwater Gulf of Mexico exploration/appraisal success and Mozambique. Preliminary analysis suggests a 10-train Mozambique LNG development (37%WI) would add $10-15/share to our target price. Base Case Target: $120/share for 73% upside. [Editor's note: Target prices are based on five-year discounted cash flow analyses which assume $90/$5 long-term crude oil/natural gas prices.]

EOG Resources (EOG): The Eagle Ford [shale oil play] comprises about one-third of EOG's capital outlays this year though we expect it to increase to ~40% of capital spending next year with a further reduction in gas-directed drilling. EOG's Eagle Ford leasehold generates the highest returns of any large-scale resource play in North America. Base Case Target: $158/share for 45% upside.

Cabot Oil & Gas (COG): Cabot's capital productivity is nearly twice the peer average. Our '13 estimates demonstrate the company's differential capital productivity. In '13, we believe Cabot [active in the Marcelllus shale oil play] should generate almost 3x the growth and spend ~30% less than cash flow while the peers spend ~30% beyond cash flow. Base Case Target: $69/share for 66% upside.

SM Energy (SM): Capital cost/recovery relationship suggests that SM's capital productivity is ~10% superior rather than inferior to the industry (liquids-normalized). Accordingly, we believe SM [also involved with Eagle Ford] should generate almost ~20% greater CFPS growth ('12-'14E) yet the stock trades at a ~30% discount ('13E EBITDA) to the sector. Base Case Target: $106/share for 123% upside.

Comstock Resources (CRK): We expect Comstock to experience capital productivity progression given the Eagle Ford JV and evolution in Permian Basin development (horizontal Wolfcamp). CRK trades at ~25% discount to the sector ('13E EBITDA) though offers ~25% greater CFPS growth ('12-'14E). Thus, CRK offers ~130% upside potential to our target vs. the group's ~40%. Base Case Target: $39/share for 131% upside.

Sanchez Energy (SN): Sanchez is wholly levered to the Eagle Ford trend and has a premier asset in the non-operated Palmetto area. Further, the company has completed solidly competitive vertical tests, and more recently, a strong horizontal test in the Maverick area. Base Case Target: $36/share for 89% upside.

Editor's note: For more information on Canaccord Genuity, click here.
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May have positions in all stocks mentioned.
Canaccord Financial and its affiliated companies may have a Corporate Finance or other relationship with the companies mentioned and may trade in any of the Designated  Investments mentioned herein either for their own account or the accounts of their customers, in good faith and in the normal course of market making. The authors have not received, and will not receive, compensation that is directly based upon or linked to one or more specific Corporate Finance activities, or to coverage herein.
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