Oil prices have been reeling ever since Saudi Arabia and the United Arab Emirates (UAE) reached a compromise that resolved their nearly two-week-long standoff over production levels. Under the compromise, the UAE will see its baseline production level lifted to 3.65 million from the current baseline around 3.17 million bpd when the current pact expires in April 2022.
Unfortunately, this nebulous agreement could present a risk, according to the head of oil and gas at Fitch.
“There’s a risk this could open the door to other countries to ask for their own increases,” Joseph Gatdula told Energy Voice on Friday.
Crude has been selling off with WTI sliding below $70 per barrel for the first time in weeks thanks to a double whammy of additional OPEC supply coming to markets and unfavorable fuel inventory data. The Energy Information Administration (EIA) has reported yet another sizable crude oil inventory build in gasoline and middle distillates, at 1 million barrels and 3.7 million barrels, respectively.
The markets appear spooked, with oil futures charts in deep backwardation; in fact, oil prices for U.S. crude for delivery in December 2021 are currently trading at a $7/bbl premium to oil for delivery in December 2022, the highest spread on record.
Despite the latest spate of volatility in the oil markets, we remain largely bullish on the mid-term outlook. Here are some oil and gas stocks that have outperformed the sector by a significant margin.
#1. Ovintiv
Market Cap: $6.8B
Dividend Yield: 1.44%
YTD Returns: 81.7%
A frequently off-the-radar name, Denver, Colorado-based Ovintiv Inc. (NYSE:OVV) has been seeing undeniable positive prospects. Ovintiv, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids. It operates through USA Operations, Canadian Operations, and Market Optimization segments.
OVV has rallied to a two-year high after CitiGroup upgraded shares to Buy from Neutral with a $43 price target, citing the company’s improved balance sheet and leverage ratios, including the likely achievement of its $4.5B debt target by year-end 2021.
Although OVV shares have climbed 119.2% YTD, Citi expects additional upside thanks to higher oil prices and sees the company having attractive free cash flow at its updated price deck.
OVV stock appears ideal for investors seeking mid-cap E&P exposure without going too much further on the risk curve.
#2. Northern Oil and Gas
Market Cap: $1.0B
Dividend Yield: N/A
YTD Returns: 80.9%
Northern Oil and Gas Inc. (NYSE:NOG) has a rather unique modus operandi in that it invests in oil-producing properties, acting as a financial partner to exploration and production names. The company has more than 6,000 gross producing wells, primarily in the Bakken.
NOG’s impressive rally dates back to September after it announced that it had agreed to acquire its first non-operating interest in the Delaware Basin in a $12M deal. That piece of news would have hardly turned heads if the buyer was an Exxon or a Chevron. The fact that a financially distressed company with more than a billion dollars in long-term debt and a high debt-to-equity ratio made such a bold move still deep in the throes of the crisis means that NOG really believed that an oil price rebound remained firmly in the cards, in which case its latest purchase could end up being a massive bargain. Further, NOG has upped its production guidance.
Further, NOG’s recent Marcellus Shale acquisition is expected to return an average 18% FCF yield on the investment, making the shares appear deeply undervalued despite the recent run.
Back in February, Northern Oil and Gas announced it acquired Reliance Marcellus LLC’s non-operated interest in Appalachia natural gas assets. According to the company, the acquisition will generate ~$125 million of free cash flow over the next four years with an average 18% FCF yield on the investment.
#3. Marathon Oil
Market Cap: $9.3B
Dividend Yield (Fwd): 1.36%
YTD Returns: 76.2%
Giant oil refiner Marathon Oil (NYSE:MRO) is one of the most popular stocks on stock-trading app Robinhood–and for good reason.
Oil field services companies and oil refiners have been staging an impressive recovery after being hammered in last year’s energy crisis. Indeed, Marathon Oil’s management is confident enough about the company’s outlook that it recently reinstated the dividend after suspending it in June, albeit at a lower rate of 3 cents a share compared to 5 cents before the cancellation. That modest dividend is good for a forward yield of 1.36%.
According to the company’s management, MRO becomes cash-flow positive at oil price around $35/barrel, meaning the current WTI level of $61.50 gives it a nice cushion.
Despite the rally, MRO is still trading considerably lower than 2018 levels.
Marathon oil looks like a good bet due to its relatively strong balance sheet including an untapped credit facility of $3 billion.
#4. Devon Energy
Market Cap: $17.5B
Dividend Yield (Fwd): 1.71%
YTD Returns: 63.1%
A couple of months ago, BofA Analyst Doug Leggate projected that many oil and gas stocks will see significant upside in 2021 if Brent prices are able to rally to $55 per barrel or higher. With Brent prices now in the $70 per barrel territory, many shale drillers are now home and dry.
BofA has an overweight rating on the energy sector and has advised investors to focus on Oil companies with the potential to grow their free cash flows through consolidations or other cost reduction measures, naming Devon Energy (NYSE:DVN), Pioneer Natural Resources (NYSE:PXD), and EOG Resources (NYSE:EOG).
Turns out BofA was right on the money, with DVN stock surging thanks to strong earnings and continuing cost discipline, including a variable dividend structure.
Devon has reported better than expected Q1 earnings, with GAAP EPS of $0.32 beating by $0.10 marking the eighth beat in 10 quarters though revenue of $1.76B (-15.8% Y/Y) missed by $270 million. Cash from operations before changes in working capital clocked in at $719M vs. consensus of $700.9M while free cash flow of $260M beat the consensus $206.2M.
But what’s got investors particularly excited about this company is its continuing capital discipline.
“It is important to reiterate that we have no intention of allocating capital to growth projects until demand side fundamentals recover and it becomes evident that OPEC+ spare oil capacity is effectively absorbed by the world markets,” CEO Richard Muncrief declared during the company’s earnings conference call.
Devon has adopted a variable dividend structure, something that has gone down well with Wall Street.
Devon paid an $0.11/share regular dividend and a $0.24/share variable dividend during the quarter, implying an annualized 5.5% yield. Further, the company has forecast a dividend yield of more than 7% for 2021 if current trends hold, illustrating its commitment to return more capital to shareholders in the form of dividends whenever cash flows permit.
Some Wall Street analysts have pointed to the potential for DVN to sport a dividend yield of as high as 8% by year-end.
Raymond James recently upgraded DVN shares to Strong Buy from Outperform with a $40 price target after “conducting a deep dive” into Devon’s recent well results and updating its free cash flow outlook. That represents a 37% share upside to the current price.
Another key attraction: Despite the rally, DVN stock remains relatively cheap.
#5. EQT Corporation
Market Cap:
Dividend Yield: N/A
YTD Returns: 49.1%
Pennsylvania-based EQT Corp.(NYSE:EQT) is a pure-play natural gas company with ~19.8 trillion cubic feet of proven natural gas, NGLs, and crude oil reserves across approximately 1.8 million gross acres.
EQT is no longer in growth mode and considers acquisitions as its second act in a bid to gain economies of scale and help it return capital to shareholders, though its high-profile merger with CNX Resources (NYSE:CNX) failed to sail through.
EQT also is considering a path to net-zero status, starting by replacing equipment that runs on fossil fuels with electric-powered devices as well as using real-time sensors and other technologies in a bid to cut drilling time and energy. ESG plays within the fossil fuel sector tend to go down well with investors.
EQT continues to be a leader in the use of advanced horizontal drilling technology, designed to minimize the potential impact of drilling-related activities and reduce the overall environmental footprint.
#6. ExxonMobil
Market Cap: $242.7B
Dividend Yield (Fwd): 6.07%
YTD Returns: 39.1%
The United State’s largest integrated oil and gas company, ExxonMobil Corp. (NYSE:XOM), is also one of the leading dividend aristocrats in the energy sector.
Related: OPEC Could Double Its Control Over Oil Market
Exxon Mobil Corp has been named to the Dividend Channel ”S.A.F.E. 25” list, signifying a stock with above-average ”DividendRank” statistics including a strong 5.52% forward yield, as well as a superb track record of at least two decades of dividend growth.
Last quarter, Exxon reported that industry fuel margins have improved considerably from the fourth quarter, but still remain below 10-year-lows due to high product inventory levels as well as market oversupply.
The best part: Cash flow from operating activities clocked in at $9.3 billion, managing to fully fund the dividend and capital expenditures as well pay down debt by over $4 billion.
#7. ConocoPhillips
Market Cap: $74.9B
Dividend Yield:
YTD Returns: 38.8%
Last year, Houston, Texas-based shale producer ConocoPhillips (NYSE:COP) earned itself accolades after announcing some of the deepest production cuts at a time when many shale companies were reluctant to lower production and relinquish market share. The company lowered its North America output by nearly 500,000 bpd, marking one of the biggest cuts by an American producer. This year, ConocoPhillips has kept drilling activity subdued and also kept a tight lid on capital expenditures.
And those austerity measures are now paying off.
Conoco has become the first large U.S. independent oil producer to resume its share buyback program after suspending it during last year’s oil crisis.
Conoco says it has resumed stock buybacks at an annualized rate of $1.5B, and also plans to sell off its Cenovus Energy (NYSE:CVE) stake in the current quarter and complete the sales by year-end 2022. Proceeds from the sale–valued at ~$2 billion–will be used to fund share buybacks.
COP stock is rallying again after Bank of America upgraded the shares to Buy from Neutral with a $67 price target, calling the company a “cash machine” with the potential for accelerated returns.
According to BofA analyst Doug Leggate, Conoco looks “poised to accelerate cash returns at an earlier and more significant pace than any ‘pure-play’ E&P or oil major.”
Leggate COP shares have pulled back to more attractive levels “but with a different macro outlook from when [Brent] oil peaked close to $70.’’
But best of all, the BofA analyst believes COP is highly exposed to a longer-term oil recovery.
But BofA is not the only Wall Street punter that’s gushing about COP.
In a note to clients, Raymond James says ConocoPhillips’ stock price is undervaluing the flood of cash the oil and gas company is poised to generate.
The bullish notes appear well-deserved. With WTI price in the upper-60s, ConocoPhillips should have little trouble generating copious amounts of free cash flows given the company’s cash flow breakeven level of under $30/bbl.
By Alex Kimani for Oilprice.com
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