The energy sector is the only one showing big gains this year.
So far this year through May 24, only one S&P 500 sector can claim significant gains: energy. And it’s up by a lot, rising more than 50%, with the only other sector in the green, utilities, coming in at about 2%. The energy sector’s outperformance is due to supply not keeping up with demand. During the pandemic-induced recession, prices cratered and oil and gas companies pumped less. Some even went out of business. Then, as the world recovered from the pandemic, prices began to move higher again, but investors wanted companies to pay down debt, buy back shares or boost dividends more than they wanted new exploration. Domestically, oil and gas companies are drilling for more fossil fuels now, especially as the war in Ukraine caused already high prices to spike further. With the potential for prices to stay high for some time, here are seven of the best oil and gas stocks to consider.
Civitas Resources Inc. (ticker: CIVI)
Benjamin Halliburton, chief investment officer at Building Benjamins, says the high price environment for oil and gas will last at least a couple of years. “Sanctions on Russia are not going away even when the war ends,” he says. “It takes years to plan and develop fields. The adverse regulatory environment on both drilling and pipelines is a deterrent to drilling and adds costs.” With that backdrop, one stock he sees moving higher is Civitas. With a strong balance sheet and increasing free cash flow, the company’s shares could hit $110 next year, and its annual dividend payout could hit $6. The stock closed May 24 at $69.13. “Incredibly cheap stock,” Halliburton says.
Ovintiv Inc. (OVV)
Another company with strong cash flow that Halliburton likes is Ovintiv, which has a portfolio of properties in several U.S. states and Canada, anchored by assets in the Anadarko Basin in Oklahoma, the Permian Basin in Texas and the Montney formation in western Canada. Next year, Halliburton expects the company’s free cash flow to be redirected to dividends from this year’s focus of paying down debt. If that happens, he says, the company’s annual dividend payout could jump to $3.20 to $3.60. His fair value estimate for the stock is $90 per share. The company’s shares closed at $48.92 on May 24.
Chesapeake Energy Corp. (CHK)
This oil and gas stock focuses on shale plays in Pennsylvania, Louisiana and Texas and expects to produce the equivalent of 670 million to 690 million barrels of oil in its 2022 fiscal year. “As a result of bankruptcy reorganization, CHK is essentially transformed into a new company with all-new management and a strong balance sheet,” Halliburton says. “Free cash is surging and can go toward dividends.” He projects an annual dividend payout of $5.75 for 2023, and he estimates the stock’s fair value is $100. It closed May 24 at $97.87. “Limited upside, but big dividend and low risk,” Halliburton says.
Occidental Petroleum Corp. (OXY)
Eventually, oil and natural gas prices will head lower as high prices dampen demand for fossil-fuel-generated energy and increased production stabilizes the supply-demand situation. “Slowing economic growth in China and potentially tough regulations to support clean energy could affect future oil prices,” says Uri Gruenbaum, CEO of TipRanks. “The sector could also be affected by a hike in rates.” But some are more optimistic, leaving analysts with mixed opinions on popular oil stocks, he says. One possible support for the bullish case is Warren Buffett’s recent purchase of even more Occidental Petroleum stock. His company, Berkshire Hathaway Inc. (BRK.A, BRK.B), now owns more than 15% of the company. The average 12-month price target for OXY offered by 20 Wall Street analysts on TipRanks is $70.11. The stock closed at $65.07 on May 24.
Chevron Corp. (CVX)
Berkshire Hathaway has also been buying Chevron shares recently, taking its stake to more than 8% of the oil and gas giant. “Buffett is known for his long-term outlook, and his moves in the oil and gas sector could indicate an optimistic outlook,” Gruenbaum says. “Despite high 12-month gains for energy stocks, analysts’ price targets show room for growth for energy stocks in the coming months.” For Chevron, a consensus of analysts provided by TipRanks showed 15 “buy” recommendations, nine “hold” ratings and one “sell” rating, as of May 24. The average 12-month price target is $172.56. The stock closed May 24 at $172.64.
A major oil and gas company with more potential upside than Chevron, according to the TipRanks analyst consensus, is ConocoPhillips. According to the consensus, the average 12-month price target among 14 analysts was $128.77 as of May 24. The stock closed at $109.48 that day, which would imply a more than 17% gain if that target price pans out. Twelve of the analysts have the stock at a buy, while two have it at a hold. For 2022, the company is expecting to produce about 1.76 million barrels of oil equivalent per day, according to its first-quarter report.
Targa Resources Corp. (TRGP)
The 12 analysts in a consensus provided by TipRanks all had Targa rated as a buy as of May 24. Their average 12-month price target is $90.75 per share, or more than 31% above that day’s closing price of $68.97. Rather than focusing on producing oil and natural gas, Targa is an infrastructure company that provides midstream services. It gathers natural gas and crude oil at the areas where they are produced and sells those commodities to market customers. It also says it has a leading position at a natural gas liquids hub in Texas.
7 best oil and gas stocks to buy now:
— Civitas Resources Inc. (CIVI)
— Ovintiv Inc. (OVV)
— Chesapeake Energy Corp. (CHK)
— Occidental Petroleum Corp. (OXY)
— Chevron Corp. (CVX)
— ConocoPhillips (COP)
— Targa Resources Corp. (TRGP)
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