Most top-performing stocks of 2022 up to this point are highly exposed to the red-hot energy market. Russia’s invasion of Ukraine has sent oil, natural gas, coal and other commodity prices soaring, creating an earnings tail wind for many energy sector stocks.
West Texas Intermediate, or WTI, crude oil prices are up 40% year to date and 119% since the beginning of 2021. Stocks that are highly correlated to oil prices have generally been great investments so far this year. However, high correlation to crude can be a double-edged sword, as many energy investors experienced when crude prices collapsed in early 2020.
WTI crude oil prices topped $120 per barrel as recently as mid-June, but concerns over rising interest rates and a potential U.S. recession brought crude prices of less than $100 in mid-July, though they bounced back to more than $100 on July 18. Some investors are concerned that the oil industry could be in for a repeat of 2008 and 2009 when oil prices surged to all-time highs only to collapse when the U.S. economy tanked. However, Bank of America projects that WTI will average $100 per barrel in 2022 and remain at $95 per barrel in 2023.
Here are the seven Bank of America buy-rated stocks with the highest correlation to WTI crude oil prices:
— Schlumberger Ltd. (ticker: SLB)
— Hess Corp. (HES)
— Halliburton Co. (HAL)
— Baker Hughes Co. (BKR)
— Marathon Petroleum Corp. (MPC)
— Chevron Corp. (CVX)
— APA Corp. (APA)
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Schlumberger Ltd. (SLB)
Schlumberger is one of the world’s largest international oilfield services, or OFS, companies. OFS stocks have outperformed in 2022, including a 7.8% gain for Schlumberger through July 15. However, analyst Chase Mulvehill says Schlumberger and other OFS stocks are still attractively valued. In fact, Schlumberger shares trade at just 12.2 times its 2023 earnings estimate. He is particularly bullish on Schlumberger’s exposure to international markets and potential for earnings multiple expansion.
Mulvehill says booming demand and tight supply has created an attractive U.S. pricing environment for Schlumberger and other OFS stocks.
“Continued increases in U.S. drilling and completion activity (especially private exploration and production), coupled with supply chain and labor tightness and surprisingly firm OFS discipline, have resulted in the strongest U.S. OFS pricing momentum in years that likely helps drive >50% increase in U.S. E&P capex this (year),” Mulvehill says.
Mulvehill says international OFS demand will likely start to pick up in the next six months as the Organization of the Petroleum Exporting Countries, or OPEC, brings idled rigs back online.
SLB shares have a 48% correlation to WTI crude prices — the highest of any stock Bank of America recommends. The firm has a “buy” rating and $55 price target for SLB stock, which closed at $32.30 on July 15.
Hess Corp. (HES)
Hess is a global crude oil and natural gas exploration and production company. Hess shares have been volatile in 2022 and are up 28.6% year to date through July 15. However, analyst Doug Leggate says investors may not fully appreciate how much of a defensive play Hess shares are as the company ramps up its Guyana production. Leggate estimates Hess’s Guyana property alone is worth more than the company’s entire current market capitalization.
Leggate is projecting 25% compound annual operating cash flow growth for Hess through 2025. By that time, Leggate says Guyana will represent about $3.8 billion of the company’s $6.6 billion in operating cash flow, assuming Brent crude prices of $70 per barrel. By 2030, Leggate says Guyana will make up more than 77% of the company’s $9.7 billion in operating cash flow.
The excess cash flow from Guyana can be used for share buybacks, Leggate says.
“Hess can reasonably reduce its share count by more than 20% by end 2025, amplifying dividend growth per share and the value of Guyana that has not yet peaked,” he says.
Hess shares have a 44.9% correlation to crude oil prices. Bank of America has a “buy” rating and $180 price target for HES stock, which closed at $95.21 on July 15.
Halliburton Co. (HAL)
Halliburton is a leading U.S. OFS company. Mulvehill says Halliburton management is committed to maximizing value creation rather than share gains in the North American market while pursuing profitable growth in the international market.
“HAL is entering the (international) upcycle with its deepest product portfolio ever, adding artificial lift and chemicals last cycle as well as investing heavy in drilling tools that should allow it to profitably outgrow the market as the recovery accelerates,” Mulvehill says.
Bank of America projects 28.2% revenue growth in 2022 and 21.1% growth in 2023.
Mulvehill says Halliburton’s digital technology and automation make its equipment and services more operationally nimble, technologically superior and profitable than during previous oil booms. The company is also committed to financial discipline, free cash flow generation and capital returns to shareholders. In addition, excess free cash flow will help pay down Halliburton’s debt and improve its balance sheet.
Halliburton shares are still attractively valued after gaining 21.8% year to date as of July 15. The stock trades at just 10.4 times Mulvehill’s 2023 earnings estimate.
Halliburton shares have a 44.9% correlation to crude oil prices. Bank of America has a “buy” rating and $47 price target for HAL stock, which closed at $27.86 on July 15.
Baker Hughes Co. (BKR)
Baker Hughes is a U.S. OFS company that provides equipment and technology for the energy sector. Mulvehill says Baker Hughes has been forced to manage operational risk related to its Russia business, which accounted for about 4% of the company’s total revenue in the first quarter prior to the invasion of Ukraine. However, concerns over the reliability of Europe’s supply of Russian natural gas have sent gas prices soaring, and Mulvehill says Baker Hughes’ liquid natural gas order momentum is accelerating.
Mulvehill projects 2023 free cash flow of $2.1 billion, of which at least $1.3 billion can be committed to dividends and buybacks. He also expects revenue growth to nearly double from 7.5% in 2022 to 14.9% in 2023.
“We view BKR as a unique opportunity for investors to gain exposure across multiple (oil and gas) value chains, which should provide greater earnings stability in what’s likely to be a more unpredictable oil price environment over the long term,” Mulvehill says.
Baker Hughes has a 35.5% correlation to WTI crude oil prices. Bank of America has a “buy” rating and $44 price target for BKR stock, which closed at $26.68 on July 15.
Marathon Petroleum Corp. (MPC)
Marathon Petroleum is an independent oil and gas refiner focused primarily on the U.S. Midwest, West Coast and Gulf Coast regions.
Leggate says Marathon’s second- and third-quarter earnings reports will likely be two of its strongest in history. He’s bullish on the company’s sizable free cash flow generation, which funds peer-leading capital returns. Marathon repurchased $2.5 billion worth of stock in the first quarter and pays a 2.8% dividend. Leggate projects full-year 2022 cash flow of $4 billion, even after $1.7 billion in capital expenditures and $1.3 billion in dividend payments.
Leggate says Marathon can repurchase an additional 15% of its share count via its current buyback authorization plan. In addition, cash distributions from its 67% ownership stake in MPLX LP (MPLX) represent 150% of Marathon’s current dividend, suggesting room for aggressive dividend hikes.
“Combined with shutdowns that ultimately reduced U.S. capacity by 10%, we see MPC as a core play on the theme of a new ‘regional’ golden age for U.S. refiners, with the highest cash return story in the sector,” Leggate says.
Marathon shares have a 34.5% correlation to crude oil prices. Bank of America has a “buy” rating and $135 price target for MPC stock, which closed at $84.42 on July 15.
Chevron Corp. (CVX)
Chevron is one of the largest U.S. oil majors. Leggate says Chevron’s first-quarter earnings miss wasn’t as bad as it may have seemed at first glance, given employee stock compensation played a large part.
Earlier this year, Chevron doubled its annual buyback guidance from $5 billion to $10 billion, and Leggate says the company’s strong balance sheet provides Chevron with substantial financial flexibility to further increase buybacks, boost its 4% dividend or even make targeted acquisitions. Chevron expects its capital spending and announced acquisitions in 2022 to increase by more than 50% from 2021 levels.
“Looking forward, CVX’s step up in cash returns, a balance sheet rapidly becoming best in class for the majors, and capital flexibility through the Permian stands CVX as theoretically defensive,” Leggate says.
At the same time, Leggate says Chevron’s upstream-dominant business makes it an attractive investment in an environment of higher commodity prices. In addition, Chevron shares trade at just 8.8 times forward earnings, and Leggate says its valuation could provide support for the stock in an inflationary environment.
Chevron has a 34.5% correlation to crude prices. Bank of America has a “buy” rating and $205 price target for CVX stock, which closed at $137.65 on July 15.
APA Corp. (APA)
Formerly known as Apache, APA is a major U.S. oil and gas exploration and production company. After a recent meeting with APA management, Leggate says investors don’t fully appreciate the rate at which the company is improving its business on multiple fronts, including growing cash flows; increasing buybacks; improving its balance sheet; and updating its environmental, social and governance performance.
Over the past several years, APA has restructured its business and its portfolio, focusing on its most efficient operations and reducing its operating areas by more than 50%.
“After six years of battling to reset the portfolio, we see APA amongst the most operationally levered portfolios to rising market expectations of sustainable oil and gas prices – and (APA has) the willingness and capacity to buy back 60% of the company over the next three years,” Leggate says.
Leggate projects free cash flow will ramp up from $2.1 billion in 2021 to $3.4 billion in 2022 and more than $4 billion in 2023. He also projects a free cash flow yield of nearly 60% over the next three years.
APA shares have a 31.6% correlation to WTI crude prices. The firm has a “buy” rating and $68 price target for APA stock, which closed at $31.99 on July 15.
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