Energy prices may be pulling back, as investors absorb the Federal Reserve’s possible faster-than-expected shift in its monetary policy. But, the recovery rally we’ve seen with oil and gas stocks may be far from over. At least, based on the increase in $100 price targets for the price of crude oil.
Why are energy market analysts still so bullish, even as the Fed hints it’s about to rein in inflation? The recent inflation is just one factor driving higher energy prices. Increased demand has been another factor. To top it all off, the push to “go green,” may counterintuitively give oil prices a boost as well.
How’s that? Environmentally minded shareholder activists are pushing major oil companies to diversify away from fossil fuels. This could drive a supply crunch. Again, pointing to higher prices. As for natural gas, which has also seen a big run up since the start of the pandemic recovery? As always, future price action hinges on the weather. But, even with slowing growth in LNG export demand, and rising production, the Energy Information Administration expects prices to only fall slightly ($2.93 per MMBtu, or per million British Thermal Units) in the coming year.
So, how can you gain exposure to this possible continued run-up in energy prices? These nine oil and gas stocks may have room to add to their recent gains:
- Antero Resources (NYSE:AR)
- Baker Hughes (NYSE:BKR)
- Centennial Resource Development (NASDAQ:CDEV)
- Chevron (NYSE:CVX)
- Devon Energy (NYSE:DVN)
- Halliburton (NYSE:HAL)
- Marathon Oil (NYSE:MRO)
- Occidental Petroleum (NYSE:OXY)
- Royal Dutch Shell (NYSE:RDS-A, NYSE:RDS-B)
Oil and Gas Stocks: Antero Resources (AR)
Much of the attention being paid to rising energy prices may be focused on oil. But, it’s boom times again for natural gas as well. With demand for its use in power plants picking back up, the supply gluts of before are gone. As a result, prices have nearly doubled in the past, and now stand at $3.21 per MMBtu.
This has produced an even stronger positive reaction for shares in Antero Resources. The stock soared nearly 348% in the past year, and 133.8% year-to-date. So, is it too late to ride this wave? Yes and no. On one hand, even as it’s up from last year at $13 per share, AR stock remains far below its prior multi-year highs.
Back in 2018, the last time natural gas prices spiked, shares traded around $20 per share. This may point to more runway, if the price of the underlying commodity continues to rise in value as well. On the other hand, while the EIA forecast mentioned above points to only a slight pullback in prices, it’s important to remember the high volatility of this commodity relative to crude oil. Changes in supplies, as well as the weather, can cause major price changes.
Coupled with Antero’s highly leveraged balance sheet, any change to sentiment about natural gas could mean this stock’s turbocharged rally gives way to a turbocharged sell-off. Tread carefully, but this remains a high-risk, but high possible return, to play the bounce back in energy prices.
Baker Hughes (BKR)
BKR stock has rallied in tandem with increasing energy prices. But, while rig counts are up from their 2020 lows, the industry hasn’t exactly gotten back to normal when it comes to ramping-up output. The result? Projections show this oil equipment and services leader isn’t on the verge of delivering materially stronger operating results.
Analyst estimates for Baker Hughes in 2021 and 2022 point to this. Revenue is expected to stay flat this year, only rising 7.3% in the next year. So, if that’s the case, what makes this particular play a worthwhile vehicle to ride the wave of rising oil prices? Right now, the consensus may be that U.S. oil output growth continues to be slow.
But, if it becomes clear elevated prices are here to stay, chances are exploration and production (E&P) companies will change their now more conservative tune. With a continued rebound in exploration/production will come an increased need for the oilfield services and equipment. That may result in stronger-than-expected results, and a further rebound of BKR stock, back toward $30 per share, and above (it trades for around $23 per share today).
Watch out for General Electric’s (NYSE:GE) in-progress divestiture of its minority stake in the company. If the conglomerate decides to speed up the “monetization” of its position, this may result in some downward pressure on shares. Yet, as prospects continue to improve in the oil patch, this may be a name with a greater runway than it appears at first glance.
Oil and Gas Stocks: Centennial Resource Development (CDEV)
As both a “meme stock” and as an oil and gas stock, CDEV has had a lot going for it in recent months. Thanks to both factors, its shares climbed nearly 344% so far this year. Yet, this may still be one of the best vehicles for outsized returns from the energy-price recovery trend.
Why? For starters, as an oil stock familiar with the Reddit set. This may mean it makes outsized moves if oil continues to rise, as traders more focused on the headlines than its fundamentals dive back into it. Yet, don’t take this to mean that Centennial Resource Development doesn’t have noteworthy catalysts outside of its meme stock status.
The company’s shift from natural gas to crude oil is a key positive. Also, as a Seeking Alpha commentator discussed last month, CDEV stock is a de-leveraging play. The return of positive cash flow gives it the ability to make a dent in its fairly-large debt load (around $1.1 billion).
With its meme stock/Reddit stock status, shares could see much more volatility than some of the other names listed here. If oil experiences a further pullback, it may have an outsized effect on shares – in a bad way. Most may want to stick to the more stable names. But, if you’re looking for a high-risk play that could continue to deliver high returns, consider this one to keep on your radar.
When I last wrote about Chevron, I discussed the low chances of it cutting its high-yield dividend. At the time, I argued that the dividend looks primed to remain at current levels. But, in terms of an increase? The company’s management may prefer to wait and see whether crude oil prices continue to remain elevated.
Yet, with signs pointing to rising oil prices, CVX stock still looks worth a look at today’s prices (around $106 per share). Sure, as a blue-chip energy stock, the potential in terms of price upside may be much lower than some of the more speculative oil and gas stocks out there.
Its potential returns may be more modest by comparison. But, investors with a lower risk tolerance could find it appealing. If oil still trends higher, and earnings hit the top end of estimates in 2021 and 2022 ($7.74 per share, and $9.91 per share, respectively)? This may be enough to push it back to $125 per share, a price level last seen in 2019.
Yielding 5.25% (with room for this payout to grow), coupled with the potential growth in its share price, this may be one of the best plays out there among the large integrated oil companies.
Oil and Gas Stocks: Devon Energy (DVN)
Shares in Devon Energy have now fully bounced back from their pandemic-related losses. But, still far from the $40 per share its shares fetched in the mid-to-late 2010s, at around $28 per share, this E&P name may be another great way to wager on a continued oil price rally.
There many ways DVN stock could attract increased investor attention. First, a continued increase in energy prices may enable it to beat analyst expectations. Even if its forward multiple (price-to-earnings, or P/E ratio, of 9.1x) fails to expand. Yet, with some calling for it to earn $4.41 per share in 2022, it may be a clear path back above $40 per share.
Second, right now Devon shares appear on a screener as a low-yielding stock. That is, with its current payout of 11 cents per quarter (equating to a 1.64% forward annual yield), income investors aren’t too interested. But, there is a unique feature to this company’s payout policy. Instead, its dividend is partially fixed, partially variable.
With the anticipated increase in its free cash flow, forecasts call for it to pay the equivalent of a 7% yield this year. Once this becomes widely known, it may attract dividend investors back into it, which would help it continue to gain, after its 69.2% surge so far in 2021.
Similar to BKR stock, diving into HAL stock today is a bet on a ramp-up in exploration and production. Except, in the case of this oilfield equipment and service provider, future projections point to solid growth in the coming year.
In 2022, analyst consensus calls for a 12.3% jump in revenue, and a 45.6% increase in earnings. Why is Halliburton set to see greater growth, making Baker Hughes’ projections seem lukewarm by comparison?
As InvestorPlace’s Louis Navellier discussed May 18, it may have to do with the company’s focus on servicing/supplying existing wells. Halliburton may be better positioned in an environment where oil and gas companies are cashing in on rising prices, but aren’t necessarily looking to initiate new projects.
Its current projections may be sufficient enough to send the stock climbing. But, if the company hits the top end of estimates, like $18.5 billion in 2022 sales (which would be up over 24% from the prior year), and 1.77 in earnings (more than 80% above this year’s projections), it could mean another massive move back to $30 per share, or even $40 per share. Buying into the recent pullback, at around $23 per shares, could in hindsight prove to be a winning move.
Oil and Gas Stocks: Marathon Oil (MRO)
There are many ways to play the rising energy prices trend. But, the most direct one may be to buy independent exploration names, such as Marathon Oil. The stock may have already experienced a tremendous rebound since spring 2020, as it’s gone from prices nearing $3 per share, to around $13 per share.
But, if rising prices are set to continue, it may be a long time before it starts to top out. Morgan Stanley analyst Devin McDermott seems to think so, as seen from his recent upgrade for the stock, and the raising of his price target from $12 per share to $15 per share.
Also, given how it’s not yet recovered from its multi-year losses, the party may still be far from over. Especially as the macro factors remain in favor of oil prices continuing to surge, rather than sell-off, from here.
What about downside risk? Yes, if what we’re seeing playing out now in the energy markets ends up being “transitory,” crude oil prices could pullback, and so could MRO stock. Yet, with the company cash-flow positive at $35 per barrel, barring a tremendous reversal in oil prices, it’s hard to see this, one of the top performing of the oil and gas stocks, returning back to single-digit prices anytime soon.
Occidental Petroleum (OXY)
In 2020, due to depressed oil prices, and its highly leveraged balance sheet (due to its ill-timed purchase of Anadarko Petroleum), Occidental Petroleum was seemingly in trouble. When energy demand was at its worst (during the height of “social distancing”), the company appeared to be at risk of filing for Chapter 11 bankruptcy, a risk that became reality for overextended names like Chesapeake Energy (NASDAQ:CHK) that year.
But, with crude oil’s stunning recovery, back to multi-year highs, OXY stock has rebounded right along with it. Shares have soared more than three-fold off their lows. Those who made this a “bottom fisher’s buy” last fall have seen ample gains. Yet, don’t take this to mean the ship’s sailed here.
The odds of seeing another three-fold move may be slim for investors buying this today (at about $30 per share). But, if the bull thesis plays out, and oil makes an eventual climb back to $100 per barrel, Occidental will likely continue to rebound. Back to $40 per share, and perhaps back to the $50+ it traded for, right before the fateful Anadarko deal.
Again, like with Marathon, this is one of the more direct ways to bet on the aforementioned trends continuing. Approach it accordingly. But, if you’re interested in a large-cap stock with ample rebound room, this may make for a fantastic choice.
Oil and Gas Stocks: Royal Dutch Shell (RDS-A, RDS-B)
On the surface, European-based oil giants like Royal Dutch Shell look like riskier plays. The Anglo-Dutch company is facing even greater pressure than its stateside peers when it comes to “going green.” And, not just from environmental-focused shareholders. In the case of Shell, a Dutch court recently ordered it to speed up its carbon emissions reduction plans.
The pressure in Europe for oil companies to decarbonize has affected the performance of the largest names in this category. Besides RDS-A/RDS-B stock (which has gained this year, but not as much as U.S. peers), BP (NYSE:BP) stock has delivered similarly strong, but at the same time underwhelming, performance.
So, with all its issues, why dive into this situation? As Morningstar’s James Gard recently made the case, on the flip-side to its many risks is that fact it’s a cheaply priced play on rising energy prices. The legal and regulatory pressures may make its long-term prospects murky.
But, as oil prices continue to rise, so too will its share price. Not only that, the company’s somewhat forced pivot into renewable energy could pay off down the road. This may not be the logical way to play rising energy prices. But, if you’re looking to bottom-fish in an area that’s not out of favor? Try going against the grain with Royal Dutch Shell stock.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.