On Mar. 8, U.S. President Joe Biden announced an embargo on Russian crude oil, liquefied natural gas, and coal imports. Since then, West Texas Intermediate (WTI) crude oil prices dipped from $120.67 to $99.47 per barrel, marking a decline of 17.57%. Despite this correction, crude oil stocks outperformed the market and WTI oil prices soared 33.7% year-to-date (YTD), whereas the largest crude oil ETF, the United States Oil Fund LP (NYSEARCA:USO), advanced 35.95% to $72.65 per share.
The broad equity market measured by the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) declined 7.7% YTD to around $438 per share.
Russia is the third-largest producer of oil after the U.S. and Saudi Arabia, with a total oil production of 11.3 million barrels per day. The U.S. oil market has a tiny exposure to Russian oil, as it represents only 8% of domestic oil and petroleum product imports. Russian oil filled the gap for refineries that needed different grades of crude with a higher sulfur content to make fuel at top capacities.
Here are the crude oil stocks with major exposure on U.S. oil markets that are set to benefit from the embargo on Russian oil imports:
- Diamondback Energy (NYSE:FANG)
- Continental Resources (NYSE:CLR)
- EOG Resources (NYSE:EOG)
- Devon Energy Corporation (NYSE:DVN)
- Marathon Oil (NYSE:MRO)
- Pioneer Natural Resource (NYSE:PXD)
- ConocoPhillips (NYSE:COP)
Highly Profitable Crude Oil Stocks: Diamondback Energy (FANG)
Diamondback is an independent oil and gas company operating solely in the U.S. FANG stock gained 24.23% YTD to $134 per share, posting an average performance versus oil peers. Yet, FANG offers the most attractive profitability profile of crude oil stocks in 2022, with an expected profit margin of 46.8%.
The company announced a record free cash flow (FCF) of $772 million in the fourth quarter of 2021 and expects to generate nearly $4 billion at actual oil prices. FANG posted a strong track record in the past year, beating earnings per share and revenue guidance in the last four quarters.
Diamondback’s management is also focused on enhancing shareholders’ returns. Travis Stice, chief executive officer (CEO), stated that FANG is “[…] committed to returning at least 50% of this Free Cash Flow to stockholders, and in the fourth quarter we exceeded this target and returned 67% of our Free Cash Flow through opportunistic share repurchases and our growing base dividend.”
Revenues grew significantly in 2021, surging 141.6% to $6.7 billion, but are projected to decelerate considerably this year, up only 14.9% to $7.8 billion. On the other side, net income dipped 148% to $2.18 billion in 2021, but is estimated to advance 67.6% to $3.65 billion in 2022.
Meanwhile, FANG is well-capitalized. Net debt reached $6.1 billion in 2021 and the consensus expects a steep reduction of 45% this year to $3.35 billion, depicting a low leverage ratio of 0.57x.
With these attractive fundamentals, FANG stock is currently valued at a forward Enterprise Value (EV) on earnings before interest, taxes, depreciation and amortization (EBITDA) of just 4.36x and 2022e price-to-earnings (P/E) of 8.77x. This cheap valuation and the constructive oil market outlook provide additional upside for the exploration and production specialist. Wall Street Analysts have a twelve-month average target price of $158.47 per share, representing a change of around 18% from the current price.
Highly Profitable Crude Oil Stocks: Continental Resources (CLR)
Another crude oil stock that is set to benefit from the U.S. ban on Russian oil imports is CLR stock. Continental is a pure oil & gas player, operating exclusively in the U.S. The company delivered a strong stock performance over the year, jumping 23.38% to $57 per share.
With 65% exposure to crude oil, CLR is set to benefit from the tightness of oil markets. After soaring by 121.2% to $5.7 billion in 2021, net sales are anticipated to advance 33.1% to $7.6 billion in 2022. In terms of profitability, the company delivered a profit margin of 29% in 2021, but with oil prices near $100 per barrel, CLR’s margins should reach 38% in 2022, according to analysts’ consensus.
Furthermore, the management announced an increase of the share buyback program from $1 billion to $1.5 billion and is expected to continue to sweeten shareholder returns, targeting a 2% dividend yield versus 1.73% today.
The price of CLR stock remains subdued for the moment, with an esteemed EV/EBITDA of 4.1x and a P/E ratio of 7.5x. The mean target price for CLR stock stands at $64.17 per share, corresponding to an upside of 6.9%.
Well Capitalized Crude Oil Stocks: EOG Resources (EOG)
EOG is a crude oil stock with large U.S. coverage. The company has a crude oil and condensate exposure of more than 60%. EOG stock performed well YTD, gaining 32.64% to $117 per share.
EOG’s total throughput topped guidance in fourth quarter 2021, establishing at 863.1 million barrels of oil equivalent per day, an advance of 2.29% quarter-on-quarter.
In addition, the fundamental picture of EOG should continue to improve. After generating a record FCF of $5.5 billion in 2021, the consensus of analysts anticipates a FCF lift of 17.5% to $6.3 billion this year.
Net income should bounce 54.4% year-over-year to $7 billion on the period.
More interestingly, EOG Resources had a net cash position of $100 million in 2021, which should balloon to $3.5 billion this year, if the constructive stance of oil markets remains unchanged. This will provide sufficient resources to fund additional wells, develop operations and enhance shareholder cash-return strategy.
At the current price, EOG’s valuation metrics are still attractive. The company trades at 4.8x 2022e EV/EBITDA and 9.54x forward P/E. The yearly upside potential for EOG shares stands at 10.5%, representing an average target price of $129.29 per share.
Well Capitalized Crude Oil Stocks: Devon Energy Corporation (DVN)
DVN stock shares lifted 30.9% YTD to $57.63 per share. The value proposition of DVN remains unchanged going forward as the management expects to continue to strengthen the balance sheet and return capital to shareholders.
Over the past year, DVN’s FCF generation topped $2.9 billion and the consensus expects another strong increase this year, up 53.4% year-over-year to $4.45 billion.
In terms of top-line growth, net sales soared 152.8% in 2021 to $12.2 billion, but are projected to flatten this year, increasing by only 3.1% to $12.58 billion.
In the meantime, net income is forecasted to skyrocket in 2022, up 58.9% to $4.47 billion, whereas net debt is foreseen to decline rapidly over the period, down 21.9% to $3.29 billion. With this, the leverage ratio stands at 0.41x in 2022, a marginal level for a capital-intensive crude oil company.
DVN shares are currently valued in line with most independent crude oil stocks. The company has a 2022e EV/EBITDA of 5.18x and a forward P/E of 8.64x. The mean target price in the next twelve months based on Wall Street analysts is $62.65 per share, a change of 8.71% from today’s open price of $57.60 per share.
Well Capitalized Crude Oil Stocks: Marathon Oil (MRO)
MRO stock is also expected to profit from the ban on Russian oil imports. The oil and gas company is mainly exposed to U.S. oil, with over 75% of sales coming from crude. Marathon’s shares jumped 40.6% YTD to around $23 per share, beating most crude oil stocks over the period.
The company’s financials improved significantly over the past year. With crude oil prices topping $100 per barrel, MRO’s profit margins are forecasted to nearly double in 2022 to 31.1% versus 17.3% in 2021.
Net sales grew rapidly in 2021, up 77.2% to $5.46 billion. Revenues are projected to advance at a slower pace this year at 22.8% to $6.71 billion in 2022. On the other side, net income dipped significantly last year, down 165% to $946 million. It is estimated to bounce back, up 120.5% to $2.34 billion in 2022, representing a healthy margin of 31.1% per year.
In addition, cash flow generation is expected to improve 48.4% to $3.23 billion in 2022. MRO’s debt level remains in line with independent crude oil stocks, expected at $2.01 billion or a leverage ratio of 0.42x.
The price of MRO shares is currently trading at a slight discount compared to crude oil stocks. Marathon’s valuation posts a 2022e EV/EBITDA of only 3.94x and a forward P/E of 6.94x. The mean target price for MRO stock is $26.50 per share in the next twelve months, a change of 15.22% from today’s price.
Crude Oil Stocks Trading at a Premium: Pioneer Natural Resource (PXD)
PXD is a top-tier independent earnings and profits (E&P) company with exposure to oil markets of more than 85%. Pioneer’s shares gained 32.4% YTD to $240.76 per share, following strong operations in the fourth quarter and full-year 2021.
PXD has grown top-line at a hefty pace in 2021, placing it among the fastest-growing crude oil stocks. Revenues surged 119% in 2021 to $14.6 billion.
Pioneer’s profitability of 14.5% per year is, however, in the middle of industry peers. Nevertheless, analysts anticipate a fast appreciation in 2022, with profit margins topping 32.6%. In addition, PXD shares are expected to deliver a load of FCF this year. The consensus expects FCF to advance 151.8% to $6.84 billion in 2022, compared to $2.71 billion in 2021.
The balance sheet of the company is also lower than other crude oil stocks. Net debt reached $2.95 billion in 2021, representing a leverage ratio of only 0.47x. This year, net debt is expected to shrink nearly 50% to $1.49 billion, corresponding to a marginal leverage ratio of 0.13x.
Besides, the company doubled its share buyback program to $4 billion. Out of the initial program of $2 billion, PXD had completed less than 50% of the operation and has $841 million in share buybacks ongoing. This should continue to sustain the shares of PXD over the short and medium-term.
Yet, PXD shares are currently trading slightly above independent oil and gas peers, with a forward EV/EBITDA of 5.43x and 2022e P/E of 9.8x. Analysts are giving an average target price of $253.56 per share in the next year, a 5.28% increase from PXD’s current price of $240.83.
Crude Oil Stocks Trading at a Premium: ConocoPhillips (COP)
COP stock operates mainly 48 states and 75% of total sales are derived from U.S. operations. The stock performance of ConocoPhillips has been one of the most vigorous of the crude oil market, soaring by 37.34% YTD to $99.17 per share.
Cash flow generation skyrocketed in 2021, up 1,095.5 % year-over-year to $10.4 billion, and is expected to continue to grow at a rapid pace this year, up 27.9% to $13.3 billion.
In terms of top-line growth, COP is expected to climb by 24.7% in 2022 to $60.3 billion, compared to a surge of 151.1% to $48.3 billion in 2021.
ConocoPhillips’ profit margins are expected to somewhat lag behind industry peers, as analysts esteem net margins to reach 21.8% in 2022 versus 16.7% in 2021. COP also has a strong track record, as the oil and gas specialist beat revenue and earnings per share guidance in the last five quarterly earnings releases.
In terms of valuation, COP is exchanged at 5.28x 2022e EV/EBITDA and 9.22x forward P/E. In addition, the Wall Street consensus sees additional upside for COP, despite a strong YTD performance, giving a target price for COP of $113.14 per share, representing a potential upside of 14%.
On the date of publication, Cristian Docan 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.
