Oil-and-gas stocks have trailed the broader market consistently over the past decade.
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Oil-and-gas stocks enter 2021 after one of the most tumultuous years for the industry in history. Most investors have written them off because of low prices, years of weak management, and longer-term concerns that they will become obsolete.
The stocks have trailed the broader market consistently over the past decade, and at their lows accounted for less than 3% of the S&P 500 —down from more than 10% a decade ago.
But some analysts think investors who pick the right names can still outperform next year. Paul Sankey, a prominent oil-and-gas analyst, found 10 worth considering. Six of them are core holdings, and the other four are considered more-speculative plays.
Sankey’s top pick is Enterprise Product Partners (EPD). It is what is known as a midstream company that owns pipelines and other pieces of key oil-and-gas infrastructure. The stock has a dividend yield of 8.4%, and has increased its dividend for 21 straight years. Energy-market dynamics, including strong natural-gas prices, also benefit the company, he wrote.
Chevron (CVX) is also poised to succeed in 2021 because it took more-conservative steps with its balance sheet, allowing it to make an acquisition this year, Sankey wrote. “Covid has allowed the company to do exactly what Big Oil should be doing in a calamitous recession: making acquisitions, in this case Noble Energy, which adds a mega-play in the East [Mediterranean] in one of the fastest-growing demographic regions of the world,” he wrote.
ConocoPhillips (COP), the country’s largest independent oil producer, was preparing for $40 oil prices in 2019, when most other companies were still budgeting based on higher prices. That strategy has paid off and can continue to do so, Sankey said.
Pioneer Natural Resources (PXD) has gone from having “one of the most misguided strategies of any company we cover” to becoming a promising investment by imposing cost discipline, Sankey wrote. Its deal to buy Concho Resources should allow it to become even more streamlined, he asserted.
Hess (HES) has a promising stake in a project with Exxon Mobil (XOM) in Guyana and still has decent acreage in the United States. Sankey also thinks Hess has committed to environmental efforts more than many competitors.
Natural-gas producer EQT (EQT) could be a key beneficiary of improving demand. “EQT is a terrific play on booming U.S. LNG exports and the overall natgas mega-theme,” he wrote.
Sankey’s speculative plays generally depend on something changing in the next year. With Exxon, Occidental Petroleum (OXY) and Ovintiv (OVV), activists could force action. At Devon (DVN), which is merging with WPX (WPX), the combined company might have to get more serious about cutting costs.
Write to Avi Salzman at [email protected]
