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Forget Shell, Buy These 4 Energy Stocks Instead

On Apr 5, Zacks Investment Research downgraded Royal Dutch Shell plc RDS.A – Europe’s largest energy producer – to a Zacks Rank #5 (Strong Sell), placing it in the bottom 5% of all stocks that Zacks ranks.

Why the Downgrade?

The commodity price rout has brutalized Shell’s revenues and earnings. What’s more, the outlook remains grim, with fundamentals suggesting that the odds are firmly stacked against a sustained crude rally. That’s the reason we are predicting a 9% drop in Shell’s EPS this year.

We also remain worried about the company’s rise in net debt and reduction of liquidity following Shell's $50 billion mega acquisition of BG Group plc. As it is, the combined group's (Shell + BG) capital expenditure is expected to be around $33 billion in 2016, quite high by industry standards. This is likely to place a substantial burden on the group’s leverage and credit metrics – especially with the challenging external environment.

Finally, lost reserves/production from the group's asset sales in Nigeria and heightened risk related to the company’s remaining operations in the country cannot be ignored either.

4 Alternative Bets in the Energy Space

While Royal Dutch Shell is struggling, several other stocks in the energy space are in much better positions at present. We highlight the following stocks with a solid Zacks Rank #2 (Buy) that are better options for investment in the prevailing operating background.

Here are the four stocks:

Diamond Offshore Drilling Inc. DO: Houston, TX-based Diamond Offshore Drilling is a major contract driller, providing comprehensive offshore drilling services to the global energy industry. The company aims to increase its footprint in emerging markets (such as Brazil, Australia and West Africa) to reap benefits from the recent discoveries of deepwater fields. Also, gradual improvement in the Gulf of Mexico drilling market (especially after the deepwater drilling ban was lifted), along with better bidding activity, will prove beneficial for the drilling powerhouse.

WPX Energy Inc. WPX: Tulsa, OK-based WPX Energy engages in the production of natural gas, oil and natural gas liquids. The company specializes in producing fossil fuel from on-conventional resources like tight-sands and shale formations. Its primary assets are spread in North Dakota’s Williston Basin, New Mexico’s San Juan Basin and Colorado’s Piceance Basin. The company expects to maximize returns and margins by scaling down its historically gas-weighted portfolio to make room for more oil production.

Kosmos Energy Ltd. KOS: Kosmos Energy is a leading independent oil and gas exploration and production company focusing on frontier and emerging areas along the Atlantic Margin. The Hamilton, Bermuda-based firm boasts of some high-margin assets in Ghana, Mauritania and Senegal. An active exploration program, strong balance sheet and attractive hedge position are other positives in the Kosmos Energy story.

Matador Resources Co. MTDR: Matador Resources is an independent exploration and production company engaged in the acquisition, finding, and development of unconventional onshore oil and gas properties. Its operations are concentrated primarily in the Eagle Ford in South Texas, and Permian Basin in Southeast New Mexico and West Texas. With a multi-year drilling inventory located in some of the industry’s best plays, balanced oil/gas portfolio and accretive acquisitions, Matador Resources’ asset portfolio is primed for high production growth and peer-leading returns.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report
 
DIAMOND OFFSHOR (DO): Free Stock Analysis Report
 
WPX ENERGY INC (WPX): Free Stock Analysis Report
 
KOSMOS ENERGY (KOS): Free Stock Analysis Report
 
MATADOR RESOURC (MTDR): Free Stock Analysis Report
 
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