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Target Price Raised 24% on Top Picks in Oil E&P Space

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"We think the still out of favor [oil] exploration and production sector offers a good risk/reward," a Pareto Securities report noted.

In a September 13 research note, Pareto Securities analysts discussed their revised oil price deck and top picks in the oil exploration and production (E&P) space today.

"We think the still out of favor E&P sector offers a good risk/reward due to the combination of high free cash flow and low relative valuations," the analysts wrote.

On the heels of oil exceeding US$70 per barrel (US$70/bbl), the analysts relayed they increased their short-term oil price forecast but maintained their long-term one. Now, they expect the Brent oil price to average US$75/bbl in 2022, US$78/bbl in 2023, and US$70/bbl in 2024. Pareto forecasts it to subsequently decrease gradually to about US$60/bbl and remain there long term.

"This view is driven by a continued demand recovery and [the] Organization of the Petroleum Exporting Countries (OPEC) managing the supply side," the analysts wrote. "The latter is also aided by years of low investments in non-OPEC supply that looks unlikely to change in the current environment."

The analysts reviewed their seven top picks of oil explorers/producers, on which they raised their target prices by an average of 24% in light of Pareto's higher oil price projections.

Pareto favors two companies because of their strong balance sheet, highly profitable production/development portfolio, expected dividend growth, and much lower carbon footprint than the industry's average.

These companies are Aker ASA (AKER:Oslo): Aker has guided to producing 210,000 to 220,000 barrels of oil per day in 2021. The company's development portfolio, with a US$27/bbl break even oil price, is expected to deliver 70% production growth by 2028. Pareto has a Buy rating and a NOK280 per share target price (previously NOK220) on Aker BP.

Lundin Energy AB (LNEGY:OTCPK): The company's full-year 2021 is estimated to be about 188,000 barrels of oil equivalent per day (188 Mboe/d). Pareto expects 2023 production guidance to exceed 200 Mboe/d. Pareto now has a Buy rating, changed from Hold, and a SEK340 per share price target (up from SEK290) on Lundin.

Four more companies are Pareto top picks because of their low pricing compared to current cash flow generation.

They are DNO International (DNO:OSE): Free cash flow and distributions should result in a rerating, the analysts noted. Given its new oil price forecasts, Pareto expects DNO will generate its entire 2021 enterprise value (EV) in cash flow within three years' time. Pareto has a Buy rating and an NOK18 per share price target (NOK14) previously on DNO.

International Petroleum Corp. (IPCO:TSX): Pareto increased its per share target price on this company to SEK55 from SEK36. It maintained its Buy recommendation. International Petroleum could start distributing dividends around the end of 2022.

Africa Oil Corp. (AOI:TSX): Its continued progress in Nigeria should boost the company's share price. Management is still investigating acquisition opportunities. Pareto has a Buy recommendation and new price target of SEK14 per share, up from SEK12.

Panoro Energy ASA (PEN:OSE; 1PZ:FRA): Given Pareto's revised oil price, Panoro is on track to generate its whole EV in free cash flow before year-end 2024. Within that time frame, in 2023, the company aims to increase production by greater than 30% to 12 Mboe/d. Pareto has a Buy rating and a NOK30 per share price target on Panoro.

As for Pareto's favorite oil company to short, it is Equinor ASA (EQNR:NYSE; EQNR:Oslo), because of its "substantial outperformance and premium pricing compared to peers," the analysts wrote.


1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
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Pareto Securities Disclosures, September 13, 2021

Analysts Certification
The research analyst(s) whose name(s) appear on research reports prepared by Pareto Securities Research certify that: (i) all of the views expressed in the research report accurately reflect their personal views about the subject security or issuer, and (ii) no part of the research analysts’ compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analysts in research reports that are prepared by Pareto Securities Research.

The research analysts whose names appears on research reports prepared by Pareto Securities Research received compensation that is based upon various factors including Pareto Securities’ total revenues, a portion of which are generated by Pareto Securities’ investment banking activities. 

Conflicts of interest
Companies in the Pareto Securities Group, affiliates or staff of companies in the Pareto Securities Group, may perform services for, solicit business from, make a market in, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in the publication or report.
In addition Pareto Securities Group, or affiliates, may from time to time have a broking, advisory or other relationship with a company which is the subject of or referred to in the relevant Research, including acting as that company’s official or sponsoring broker and providing investment banking or other financial services. It is the policy of Pareto to seek to act as corporate adviser or broker to some of the companies which are covered by Pareto Securities Research. Accordingly companies covered in any Research may be the subject of marketing initiatives by the Investment Banking Department.

To limit possible conflicts of interest and counter the abuse of inside knowledge, the analysts of Pareto Securities Research are subject to internal rules on sound ethical conduct, the management of inside information, handling of unpublished research material, contact with other units of the Group Companies and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. The object of the internal rules is for example to ensure that no analyst will abuse or cause others to abuse confidential information. It is the policy of Pareto Securities Research that no link exists between revenues from capital markets activities and individual analyst remuneration. The Group Companies are members of national stockbrokers’ associations in each
of the countries in which the Group Companies have their head offices. Internal rules have been developed in accordance with recommendations issued by the stockbrokers associations. This material has been prepared following the Pareto Securities Conflict of Interest Policy.

The guidelines in the policy include rules and measures aimed at achieving a sufficient degree of independence between various departments, business areas and sub-business areas within the Pareto Securities Group in order to, as far as possible, avoid conflicts of interest from arising between such departments, business areas and sub-business areas as well as their customers. One purpose of such measures is to restrict the flow of information between certain business areas and sub-business areas within the Pareto Securities Group, where conflicts of interest may arise and to safeguard the impartialness of the employees. For example, the Investment Banking departments and certain other departments included in the Pareto Securities Group are surrounded by arrangements, so-called Chinese Walls, to restrict the flows of sensitive information from such departments. The internal guidelines also include, without limitation, rules aimed at securing the impartialness of, e.g., analysts working in the Pareto Securities Research departments, restrictions with regard to the remuneration paid to such analysts, requirements with respect to the independence of analysts from other departments within the Pareto Securities Group rules concerning contacts with covered companies and rules concerning personal account trading carried out by analysts.

Pareto Securities AS may hold financial instruments in companies where a recommendation has been produced or distributed by Pareto Securities AS in connection with rendering investment services, including Market Making.

Please find below an overview of material interests in shares held by employees in Pareto Securities AS, in companies where a recommendation has been produced or distributed by Pareto Securities AS. "By material interest" means holdings exceeding a value of NOK 50 000: Aker, DNO International, Panoro Energy, Equinor.

Overview over issuers of financial instruments where Pareto Securities AS have prepared or distributed investment recommendation, where Pareto Securities AS have been lead manager/co-lead manager or have rendered publicly known not immaterial investment banking services over the previous 12 months: Aker, Panoro Energy.

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