The energy sector has lagged the S&P 500 in 2023, and the International Energy Agency anticipates soft global oil demand in 2024. Oil and gas prices have declined recently, but WTI crude oil prices remain up more than 64% overall in the past three years.
Stocks that are highly correlated to oil prices are still generating tremendous free cash flows. However, high correlation to crude can be a double-edged sword, as many energy investors experienced when crude prices collapsed in 2020. Here are seven Morgan Stanley overweight-rated stocks that have historically had high correlation to WTI crude oil prices:
| Stock | Implied upside from Dec. 15 Closing Price |
| Targa Resources Corp. (ticker: TRGP) | 33.5% |
| Schlumberger Ltd. (SLB) | 18.8% |
| Halliburton Co. (HAL) | 25.6% |
| ConocoPhillips (COP) | 9.1% |
| Baker Hughes Co. (BKR) | 19.1% |
| Devon Energy Corp. (DVN) | 15.9% |
| Marathon Petroleum Corp. (MPC) | 7.8% |
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Targa Resources Corp. (TRGP)
Targa Resources is a U.S. midstream logistics company that specializes in onshore natural gas and natural gas liquids, or NGLs. Analyst Robert Kad says Targa benefits from a sustained recovery and stabilization of Permian Basin gas production. Kad says Targa’s nearly 90% dividend cut in 2020 and its reduction in capital spending helped the company transition to positive free cash flow generation and reduce its debt burden when energy prices recovered in subsequent years. Targa also intends to raise its 2024 dividend by an impressive 50%. Morgan Stanley has an “overweight” rating and $114 price target for TRGP stock, which closed at $85.41 on Dec. 15.
Schlumberger Ltd. (SLB)
Schlumberger is one of the world’s leading oilfield services companies. Analyst Daniel Kutz says the market has high expectations for Schlumberger given how well-positioned the company’s services portfolio appears to be for this point in the energy market cycle. Fortunately, Kutz says Schlumberger’s third-quarter performance and 2024 guidance lived up to those high expectations. He says Schlumberger is a great way for investors to play the pricing recovery and elevated activity in international oil markets, and he predicts the Middle East will be a key growth driver. Morgan Stanley has an “overweight” rating and $62 price target for SLB stock, which closed at $52.19 on Dec. 15.
Halliburton Co. (HAL)
Halliburton is a leading U.S. oilfield services company. Kutz says Halliburton’s third-quarter results and 2024 guidance came in slightly ahead of expectations thanks to strength in the company’s North American business. While the stock has been punished for lackluster international growth numbers, Kutz says the company’s guidance for double-digit international revenue growth in 2024 is solid and may even prove to be overly conservative. At its current valuation, Kutz says investors are underestimating Halliburton’s commitment to capital discipline and its free cash flow potential. Morgan Stanley has an “overweight” rating and $45 price target for HAL stock, which closed at $35.82 on Dec. 15.
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ConocoPhillips (COP)
ConocoPhillips is one of the world’s largest independent oil and gas exploration and production companies. Analyst Devin McDermott says ConocoPhillips is perfectly positioned for sustained outperformance given the company’s investment discipline and high-quality, low-cost asset portfolio. McDermott says ConocoPhillips provides consistent shareholder returns and generates substantial free cash flow. ConocoPhillips anticipates about $11 billion in shareholder returns in 2024, which translates to about an 8% total cash return yield at $80 WTI prices. McDermott says ConocoPhillips provides exposure to oil price upside with limited downside risk. Morgan Stanley has an “overweight” rating and $125 price target for COP stock, which closed at $114.54 on Dec. 15.
Baker Hughes Co. (BKR)
Baker Hughes is a U.S. oilfield services company that provides equipment and technology for the energy sector. Kutz says Baker Hughes’ total orders and free cash flow meaningfully beat expectations in the third quarter. The company has guided for fiscal 2023 international growth in the mid-teens range and North American growth in the mid-to-high single-digit range. Kutz says Baker Hughes’ upstream businesses have benefited tremendously from the post-pandemic recovery in oil market activity, and the company’s heavy international market exposure is also a positive. Morgan Stanley has an “overweight” rating and $40 price target for BKR stock, which closed at $33.58 on Dec. 15.
Devon Energy Corp. (DVN)
Devon Energy is one of the largest U.S. independent oil and gas exploration and production companies. Degrading well productivity and disappointing production have weighed on Devon’s stock in 2023. Its share price has underperformed peers by about 20% year to date, and its 2023 decline of more than 20% is the worst performance of any stock on this list. However, Devon’s share price pullback has pushed its dividend yield up to 6.4%, highest on this list. McDermott says management is taking proactive steps to address Devon’s 2023 issues. Morgan Stanley has an “overweight” rating and $52 price target for DVN stock, which closed at $44.87 on Dec. 15.
Marathon Petroleum Corp. (MPC)
Marathon Petroleum is an independent petroleum products refiner and marketer focused on the U.S. Midwest, West Coast and Gulf Coast regions. Including dividends, Marathon shares are up 30.5% year to date through Dec. 15, the best 2023 performance of any stock on this list. Even after the impressive rally, analyst Joe Laetsch says there is more upside potential for Marathon in 2024. Laetsch says Marathon’s refining margins and throughput surprised to the upside in the third quarter and Marathon’s $13 billion in cash also creates potential for substantial shareholder returns. Morgan Stanley has an “overweight” rating and $160 price target for MOC stock, which closed at $148.38 on Dec. 15.
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7 Oil Stocks to Buy Closely Tied to Crude Prices originally appeared on usnews.com
Update 12/18/23: This story was previously published at an earlier date and has been updated with new information.
