Goldman says this under-the-radar energy stock has 40% upside

Permian Resources is primed for strong gains ahead, according to Goldman Sachs. Analyst Neil Mehta initiated coverage on the energy company with a buy rating and 12-month price target of $19, which suggests about 40.6% upside. This year, the stock has lost roughly 1% this year and about 16.7% this quarter amid a rough quarter for the broader energy sector. Permian Resources produces oil and natural gas primarily from the Permian Basin, which is the highest-producing oilfield in the U.S. located in West Texas and southern New Mexico. “We are recommending PR as the stock carries several fundamental elements that position it to outperform peers,” Mehta said in a Sunday note to clients. According to the analyst, the company appears attractive given these qualities: Permian Resources has “scarcity value” as one of the few high quality pure-plays focused in the Permian Basin, leading to a strong inventory quality compared to peers Permian Resources has the potential to improve costs The company has strong local relationships in the Permian Basin, which Mehta believes helps support its active M & A strategy and in the pricing of services and materials that supports cost leadership “These elements have driven a strong execution track record through earnings, which we believe is relatively idiosyncratic compared to oil focused [exploration and production] peers, especially in a more mature phase of shale development, and should allow the stock to attract capital on a relative basis,” the analyst said. Mehta set an 11% free cash flow yield target for the company. That’s above rivals such as Diamondback Energy, which trades at about 10% free cash flow yield. “It is a premium to other oily peers that may not have the concentration of acreage in high quality resource base in the Delaware Basin, leading to better well performance and visibility of inventory quality for PR,” the analyst said about his FCF expectation. He noted that he prefers Permian Resources’ pure-play exposure to the Delaware Basin, which has seen its productivity rates consistently outperform that of other oily basins over the past several years and also has the largest inventory remaining in low-cost areas.