Are Oil Stocks Worth Investing Right Now?

The geopolitical dispute between Russia and Ukraine has led the Group of Seven (G7) countries to ban the import of Russian crude while the European Union (EU) is considering the same. This has led oil prices to surge and break through the $100 mark, but oil production is not following the same upward trajectory.

According to a the wall street journal report last week, nine of the largest oil producers in the United States distributed a total of $9.4 billion to shareholders in the form of dividends and share buybacks, more than 50% more (54 % to be exact) than these companies have invested in developments.

According to the report, the reasons for the limited oil production range from controlled investments, supply chain bottlenecks and harsh winter conditions.

The report quotes JP Morgan Chase analyst Arun Jayaram as saying, “Historically, this industry has reacted to commodity prices. Now they are sitting on their hands.

In this scenario, should investors chase oil stocks for their dividend yield or stay away as oil production is reduced in some cases and stable in others? We’ve gone through the TipRanks stock screen and explored three oil stocks that Wall Street analysts are bullish on and that could offer investors a significant upside from current levels.

ConocoPhillips is an oil exploration and production company, headquartered in Houston, Texas. The company has operations in 13 countries and total assets worth $93 billion. The oil giant posted strong first quarter results with adjusted earnings of $3.27 per share compared to $0.69 per share in the same period last year.

Ryan Lance, President and CEO of ConocoPhillips, said: “We have also increased our 2022 shareholder return targets by an additional 25%, to a new total of $10 billion, as we continue to execute all elements of our triple mandate.

Lance added his earnings call that COP has “over five years of experience returning well over 30% of our CFO [cash flow from operations] to our shareholders.

In the first quarter, COP paid $0.9 billion in ordinary dividends and variable return cash (VROC) payments while repurchasing shares worth $1.4 billion.

According to Mizuho Securities analyst Vincent Lovaglio, the expected COP payout in 2022 implies a dividend yield of 7.3%, which is “a premium to some larger-cap U.S. E&Ps.” [exploration and production] plays with greater short-cycle exposure.

The top-rated analyst believes this premium is “justified” due to lower COP leverage at 0.5x net debt to cash flow, ever-lower capital requirements and “ relatively larger investments in longer cycles, which adds visibility into longer-term resource development. and production, all of which contribute to greater confidence in (1) cash returns throughout the cycle and (2) paying relatively higher regular dividends.

COP generated $7 billion in cash from its operations and successfully reduced its total debt by $1.2 billion. The company aims to reduce its debt by about $5 billion.

Regarding oil production, COP averaged 1,747,000 barrels of oil equivalent per day (MBOED) in the first quarter, a “record level of production” for the company since becoming a independent oil producer about ten years ago.

However, for FY22, the company reduced its oil production target from BOED 1.8 million earlier to around 1.76 million. This is to reflect “the net impact of the closure of A&D [acquisitions and dispositions] activity at this point in the year, as well as some expected weather and well timing impacts.

Inflation was also the running theme of the COP, which led to an increase in the investment forecast for FY22 from $7.2 billion earlier to $7.8 billion.

Analyst Lovaglio questions whether the trend of increasing non-operating spending by several exploration and production companies in the United States is “more a function of increased activity or relatively greater exposure to closeness of services and supply”.

Nonetheless, the analyst is bullish on the stock with a Buy rating and a price target of $150 on the stock, implying upside potential of 32.4% at current levels.

The rest of the street analysts also side with Lovaglio, resulting in a strong buy consensus rating based on 12 buys and two holds. The average COP stock forecast is $128.69, implying a potential upside of 32.4% from current levels.

Pioneer is an independent petroleum exploration and production company based in Irving, Texas, which “explores, develops and produces petroleum, NGLs [natural gas liquids] and gas in the Midland Basin in West Texas.

In the first quarter, PXD generated strong free cash flow (FCF) of $2.3 billion, with approximately 90% of that cash flow returning to shareholders.

Pioneer CEO Scott D. Sheffield commented on the results, “Consistent with our robust investment framework, backed by our low reinvestment rate and industry-leading free cash flow yield, the board directors declared a more variable base dividend for the second quarter of $7.38 per share, which equates to an annualized return of 13%, the highest yield in the S&P 500, combined with the redemption of 250 million worth of stock in the first quarter.

The company generated net income of $2 billion in the first quarter, with earnings of $7.85 per diluted share.

Shares of PXD have been on an upward trajectory this year, with the stock jumping 30.7% year-to-date.

Interestingly, Scott Sheffield, commented on the earnings call that “Pioneer’s return on capital framework is resilient through the cycle, resulting in strong dividend payouts across a wide range of commodity prices. , even taking into account the impact of cash taxes”.

Continuing to elaborate, Sheffield pointed out that if oil prices remained at an average of $60 for the rest of the year, PXD shareholders would receive around $17 in dividends per share while at $120 they would receive $31. dollars.

The CEO added that PXD shareholders “have a significant advantage in higher oil prices because we have 0 [zero] Oil covers 2022.”

Regarding oil production, PXD expects oil production to average between 342 and 357 MBOEPD, while total production is expected to average between 623 and 648 MBOEPD. This midterm oil production forecast was lower than Siebert Williams Shank analyst Gabriele Sorbara’s estimate of 354 MBOEPD and 2.5% below consensus estimates.

Given “strong capital returns and a reaffirmed outlook for 2022”, Sorbara is bullish on the stock with a buy rating and sees PXD as a “unique pure play in the Midland Basin with a yield framework of clear capital which should result in a high premium valuation relative to its peer group.”

The analyst has a price target of $372 on the stock, closer to Street’s high price target of $400, implying significant upside potential of 52.2% at current levels.

Other Wall Street analysts are also bullish on the stock with a strong buy consensus rating based on 15 buys and five holds. The average forecast for PXD shares is $294.75, implying upside potential of 20.6% from current levels.

Schlumberger is a large offshore drilling services company. SLB also had a strong first quarter with revenue up 14% year-on-year to $6 billion. Earnings were $0.36 per share, a 71% year-over-year increase.

Additionally, the company’s board of directors approved a 40% increase in the cash dividend to $0.175 per share. Evercore ISI analyst James West sees the rise as “a clear indication that visibility into achieving its margin targets is improving.”

With rising oil demand, soaring commodity prices and geopolitical uncertainty regarding Russia’s invasion of Ukraine, Schlumberger said in its earnings press release that “We believe the current momentum of the market should enable us to maintain our ambitions for annual turnover. growth in mid-adolescence.

Given these factors, SLB remains West’s top choice and he considers the company to be “extremely well positioned for the current up cycle due to its strong international and offshore exposure, disciplined approach to capital, its leading digital business and harnessing the advantages of size, scale and reach.”

The analyst reiterated a Buy rating and $51 price target on the stock, implying upside potential of 34.1% at current levels.

Other Wall Street analysts are also bullish on the stock with a Strong Buy consensus rating based on a unanimous consensus of 14 buys. The average forecast for SLB shares is $50.73, implying upside potential of 33.4% from current levels.

Conclusion

It can be seen from the above list that if oil companies slow production due to inflationary concerns or supply chain constraints, the above three companies continue to return significant capital to their shareholders in the form of dividends. or share buybacks.

If and when inflation slows and supply chain blockages cease to exist, it is possible that oil production will also increase, which will allow these companies to benefit from higher oil prices.

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Felix J. Dixon