Oil prices are surging — these eight stocks are still bargains for long-term investors


The combination of low investment in new oil wells and rising demand underscores what could be a long period of high energy commodity prices. Meanwhile, many oil and gas stocks continue to trade at low valuations with expected gains despite a sector-wide rebound dating back to the end of 2020.

Although the energy sector of the S&P 500 SPX,
-1.22%
is the only one that has increased this year, investors seem to be still in an early stage of a lucrative multi-year cycle.

Simon Wong, an analyst at Gabelli Funds in New York, and Charles Lemonides, investment director at ValueWorks in New York, named each of his favorite oil stocks during the interviews. These companies are listed below.

Low investment is good for the oil industry and investors

On March 2, Sam Peters, portfolio manager at ClearBridge Investments, provided this chart for this article featuring two of his energy stock selections:

On the left, the graph shows that the capital expenditures of the oil industry had increased during previous periods of low supply. But the right side of the chart shows that capital spending fell very low last year as inventories were declining.

Oil producers had already been hit by the price collapse that began in 2014. But action during the first closures of the 2020 pandemic briefly brought first-month contract prices below zero. These experiences have caused oil company executives to shy away from making the typical capital spending commitments at a time of high demand. The focus remains on maximizing cash flow and returning cash to investors through dividends and stock repurchases.

In the previous article, Peters recommended two actions: EQT Corp. EQT,
+ 4.59%,
which increased by 50% from March 1 (the day before the article was published with its recommendations) to May 10, and Pioneer Natural Resources Co. PXD,
+ 0.86%,
which rose 4%. These price increases exclude dividends: Pioneeer’s dividend yield is 6.96%.

We don’t need $ 100 oil. If oil stays above $ 80, these companies can still produce a lot of free cash that they can return to shareholders.


– Simon Wong, Gamco Energy Sector Research Analyst.

Oil prices have been quite volatile lately, with so many different forces at play, including the Russian invasion of Ukraine, which directly disrupted oil markets; Aggressive blockades of Chinese cities to stifle new coronavirus outbreaks; and the reopening of travel to many markets around the world, including the United States. These and other factors have contributed to the price of crude oil West Texas Intermediate CL.1,
+ 5.40%
to range up 13% from an intraday high ($ 111.37 a barrel on May 5) to an intraday low ($ 98.20 on May 11) this month alone.

Wong estimated that when it began in 2022, global demand for crude oil ranged from 100 to 101 million barrels a day, while oil was producing at a rate of about 98.5 barrels a day.

The WTI closed at $ 99.76 on May 10, from $ 75.21 at the end of 2021.

Wong said new sources of oil in the U.S. over the past 10 years had been mainly “short-term supply growth” because “it lost between 50% and 70% in the first year” of operation. a shale well.

“The United States can recover supply,” he said. But that has not yet begun, because “shareholders want operators to be more disciplined.” Wong also noted a difficult political environment for the construction of pipelines, increased regulations and the difficulty of applying for loans from banks, while increasing the cost of developing new sources.

Overall, the oil scene is “bad news for consumers, but good news for investors,” Wong said. “We don’t need $ 100 of oil. If oil stays above $ 80, these companies can still produce a lot of free cash that they can return to shareholders,” he added.

Favored oil stocks

Wong pointed to Canada as a more friendly market for U.S. investors because Canadian wells tend to last between 20 and 25 years, according to his estimate.

Among Canadian oil producers, Wong likes Suncor Energy Inc. SU,
+ 4.22%

SU,
+ 3.74%
and Meg Energy Corp. MEG,
+ 1.23%
how to play with free cash flow. According to the May 10 closing stock prices and the agreed free cash flow estimates for the next 12 months among analysts surveyed by FactSet, Suncor’s estimated free cash flow performance is 18, 28%, while Meg Energy’s estimate is 25.68%. They are very high, compared to the consensus estimates of 5.07% for the S&P 50 and 11.15% for the S&P 500 energy sector.

American producers like Exxon Mobil Corp. XOM,
+ 2.99%
in the long run, in part because of its large investment in offshore development in Guyana, with a potential reserve development of 10 billion barrels, according to its estimate.

Wong also favors two oil field service giants: Schlumberger Ltd. SLB,
+ 2.16%
and Halliburton Co. HAL,
+ 2.20%.

Lemonides noted “a great opportunity for investors approaching today,” after such a long period during which investment in production was not economically viable. His advice is to look beyond the current “turns” of the energy market because “the general direction of economic growth is likely to be strong.”

He listed three oil stocks that he considers have a lot of discounts now; all three emerged from pandemic-driven bankruptcies:

  • WLL of Whiting Petroleum Corp.,
    + 3.32%
    is a shale oil producer that trades only three times the consensus earnings estimate for the next 12 months among analysts surveyed by FactSet. When the company went bankrupt in April 2020, it had about $ 3 billion in debt. The market capitalization of the company is only $ 2.9 billion now. Although the anticipated P / E ratio is so low, Lemonides believes the company will earn more than analysts expect.

  • Valaris Ltd. VAL,
    + 4.01%
    is an offshore drill that emerged from the bankruptcy of the pandemic era. Its market capitalization is now $ 3.9 billion, and Lemonides said the company’s drilling vessel fleet had been built at a cost of about $ 20 billion at a time when oil prices they ranged from $ 85 to $ 100. Now that oil is back in that range, “a significant percentage of the fleet has returned to work and demand is growing every day,” he said.

  • Tidewater Inc. TDW,
    + 2.69%
    manages a different type of fleet that moves supplies to and from offshore platforms. The company also serves the offshore wind power generation industry. The company’s market capitalization is $ 835 million, which is about a third of what it would cost to replace its increasingly busy fleet, according to Lemonides.

Here is a summary of the forward P / E ratios (except for Tidewater, which is expected to have net losses in 2022 and 2023) and the opinions of analysts consulted by FactSet of the eight shares discussed by Wong and Lemonides . The table uses Canadian stock tickers for Suncor and Meg Energy; stock prices and targets are in local currencies:

Company

Ticker

Forward P / E

Share “purchase” scores.

Closing price: May 10

Agreed target price

Implicit bullish potential of 12 months

Suncor Energy Inc.

SU,
+ 3.74%

6.5

62%

44.71

51.89

16%

MEG Energy Corp.

MEG,
+ 1.23%

5.3

64%

18.63

24.93

34%

Exxon Mobil Corporation

XOM,
+ 2.99%

9.4

45%

85.02

98.46

16%

Schlumberger NV

SLB,
+ 2.16%

18.1

88%

37.89

50.03

32%

Halliburton Co.

HAL,
+ 2.20%

16.3

79%

34.30

46.07

34%

Whiting Petroleum Corp.

WLL,
+ 3.32%

3.2

56%

72.53

100.00

38%

Valaris Ltd.

VAL,
+ 4.01%

25.5

100%

52.40

71.71

37%

Tidewater Inc.

TDW,
+ 2.69%

# N / A

50%

20.10

18.50

-8%

Source: FactSet

Click on the tickers for more information about each company.

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