2021 was an exceptionally strong year for energy stocks overall. In fact, energy will finish 2021 as the top performing group within the S&P 500.
As you may already have guessed, oil and gas prices had much to do with the strong annual performance. But, despite the strong year, there are concerns around the sector. Chief among those concerns are environmental, social and governance (ESG) considerations and the larger energy transition. The evolution of the sector makes it one currently prone to rapid changes.
That said, let’s look at how the sector fared. According to Yardeni Research, the S&P energy sector increased by 47.7% in 2021. Only one sub sector, oil & gas drilling, performed negatively, posting -0.6% returns.
On the other hand, exploration & production stocks had a boon year, with 81.4% appreciation during the period. The other bright spot is that all other sub sectors of energy posted at least 25.4% returns over 2021.
In short, 2022 could easily continue to be a winner for the energy sector.
- Continental Resources (NYSE:CLR)
- DiamondBack Energy (NASDAQ:FANG)
- Devon Energy (NYSE:DVN)
- ONEOK Inc. (NYSE:OKE)
- Chevron (NYSE:CVX)
- Targa Resources Corp. (NYSE:TRGP)
- Energy Transfer (NYSE:ET)
Energy Stocks With Momentum: Continental Resources (CLR)
Continental Resources is an exploration and production (E&P) firm that operates in the Dakotas, Montana and Oklahoma. The company is the largest leaseholder in the Bakken area, which stretches across North Dakota into Montana. One reason to consider Continental Resources is that the company has a lot of proven reserves.
Between 2015 and 2019, Continental Resources increased its proven reserves from under 1,300 million barrels of oil equivalent (MMBoe) to above 1,600 MMBoe. This means the firm has decades of cost efficient production on tap. So, as prices become more attractive for the firm, it should theoretically be able to quickly capitalize. That should lead to strong profitability, which should result in increasing stock prices.
CLR stock does have momentum as well. In 2021, its shares increased by a whopping 180%. And there’s reason to believe 2022 will be strong as well.
The firm’s most recent earnings report sheds some light on that notion. Continental Resources recorded a record $669 million in free cash flows in Q3 and projects $2.6 billion in full year FCF.
The company is using this surfeit of cash to expand into the Permian Basin and expects that decision to be immediately accretive to FCF capacity.
Diamondback Energy (FANG)
Diamondback Energy also had a very strong year. It appreciated by 120% and there’s reason to believe that will continue into 2022. One of the simplest measurements, target prices, suggests that is indeed the case.
Not only is FANG stock an overwhelming ‘buy’ as rated by Wall Street, but it also has appreciation in store. Average target prices sit at $136.33, and range as high as $165. ITs current price of $121 makes either scenario attractive.
Diamondback Energy is involved in the E&P portion of the energy sector and acquires and develops operations in West Texas, specifically the Permian Basin. In my mind, Diamondback Energy is what might be called a stereotypical oil company. Its strategy is that through the “conversion of our undeveloped reserves to developed reserves, we will seek to increase our production, reserves and cash flow while generating favorable returns on invested capital.”
It seems to be working as the firm recorded $740 million in FCF in Q3. Investors should be aware that Diamondback Energy committed to return 50% of that to investors beginning in Q4.
Energy Stocks With Momentum: Devon Energy (DVN)
Devon Energy is another E&P firm with room to appreciate in its stock. Yes, its share prices are expected to rise, but investors should also consider it because, like many energy firms, Devon Energy is committed to returning excess cash to shareholders.
The company increased its fixed-plus-variable dividend by 71%, to 84 cents per share when it released earnings in early November. It also initiated a $1 billion share buyback program at that time, representing 4% of its market capitalization.
The company basically had a boon quarter: “Free cash flow generation accelerated to $1.1 billion, an 8-fold increase from the fourth quarter of 2020.”
It used this massive surge in cash to bolster its cash on hand by $782 million, reaching $2.3 billion total. It is safe to say that the company has enough cash to pursue multiple operational opportunities.
The strong quarter was underpinned by average daily production of 608,000 barrels of oil during the quarter, exceeding guidance by 5%. The majority of the firm’s production, 67%, came from the Delaware Basin. The company ended the quarter with 16 operating rigs across its geographical footprint.
ONEOK Inc. (OKE)
ONEOK Inc. is an energy firm focused on midstream natural gas. That means it is involved in the processing, storage, transportation and marketing of energy.
Although OKE stock performed well in 2021, increasing by 57%, it doesn’t carry strong ratings. The majority of analysts simply rate it a hold, giving it an average target price of $65.10. That leaves a bit of room for appreciation given that it currently trades at $61.91. Given that revenues are anticipated to rise from $15.11 billion in 2021 to $17.6 billion in 2022, there is reason for price optimism.
Further, ONEOK should appeal to energy investors looking for an ESG slant. After all, it is no secret that investors are leery of the transition from fossil fuels and how ESG matters figure into that. In short, they worry that E&P firms could get dinged for environmental concerns.
ONEOK appeals on that front because it is the most widely held energy equity among large ESG funds globally. On top of that, OKE stock is included in more than 20 MSCI ESG indices. It is a safe bet in 2022 at any point when ESG concerns become fashionable again.
Energy Stocks With Momentum: Chevron (CVX)
Throughout 2021, Chevron shares increased from $84 all the way up to roughly $118. There’s still plenty of room left for CVX to reach target prices as well.
Chevron had a strong recent quarter, which should bolster investor sentiment. In the three months ended on Sept. 30, Chevron showed massive improvement. Total earnings hit $6.111 billion, up from a $207 million loss in the same period a year prior.
It would be easy to attribute that success to a simple argument relying on a pandemic turnaround. But that would be a mistake. The truth is that those earnings were the firm’s best showing in Q3 since 2013.
Chevron’s free cash flows were its highest ever in a given quarter. That allowed it to pay $2.6 billion in dividends and pay down $5.6 billion of debt. On top of that, the firm also repurchased $625 million worth of shares in Q3.
2022 should be strong as well with Chevron expected to record $173 billion in revenue, higher than the $157.77 expected this year. That should reasonably mean that investors can expect free cash returned their way in the form of dividends and share buybacks.
Targa Resources Corp. (TRGP)
Targa Resources Corp., like ONEOK, is a midstream natural gas operator. But unlike OKE stock, TRGP stock has Wall Street fully behind it. With a target price $12 above its current $55 price and an overwhelming majority of ‘buy’ ratings, it is a worthwhile investment.
Its most recent earnings report indicates that things are going well for the firm. The firm recorded $505.9 million in EBITDA in Q3 ’21, better than the $419.1 million a year prior. That $505.9 million in EBITDA was also a 10% increase above the second quarter.
Basically, Targa Resources Corp. is a rapidly growing firm, growing revenue 111% between Q3 ’21 numbers and Q3 ’20 numbers.
TRGP stock also makes sense as energy investors increasingly demand cash to be returned their way. The firm’s distributable cash flow also increased by 28% through Q3 of 2021.
Energy Stocks With Momentum: Energy Transfer (ET)
Energy Transfer isn’t a household name in the energy sector. But as you likely guessed, it deals with transportation and transmission of natural gas. It is a small cap firm with a low price of $9.03. However, average target prices suggest it could trade at $14.29 in the future.
There are a few reasons to be bullish on ET stock aside from target prices. Net income in Q3 hit $635 million. That was $1.29 billion higher than the comparable quarter a year prior. The firm is also reducing its debt in the wake of an oil boon. Thus far in 2021, Energy Transfer has reduced its debt by $6 billion.
In early December Energy Transfer completed its acquisition of Enable Midstream, which increased its pipeline totals to 114,000 miles across the U.S.
The company estimates that the acquisition is accretive to the tune of $100 million and plans to use that increased efficiency to continue to deleverage its operations. That should logically lead to increased value for the firm which should translate to increased stock prices.
On the date of publication, Alex Sirois 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.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.