Should oil stocks undergo a correction?

Crude oil prices fell past $120/bbl to three-month highs after Saudi Arabia increased the official sale price of its Arab light crude to Asia. Energy traders remain largely optimistic that supplies will remain tight and continue to support high oil prices given the short-term supply outlook.

Citing tighter market balances, several analysts raised their oil price targets, with Town saying they expect Russian production and exports to fall by 1 to 1.5 million barrels per day by the end of 2022.

Unsurprisingly, several oil stocks are trading at all-time highs, namely Conoco Phillips (NYSE:COP), EOG Resources (NYSE: EOG), Marathon Petroleum Corp. (NYSE: MPC), Valero Energy Corp. (NYSE: VLO), Civitas Resources (NYSE: CIVI), Whiting Petroleum Corp. (NYSE: WLL), Oil Oasis (NASDAQ: OAS) and Matador Resources (NYSE: MTDR).

But a cross section of analysts are now warning that rising oil prices could be in danger of collapsing.

Energy traders are confident this oil market will remain tight given near-term supply prospects from OPEC+ and the US, but it has been rising steadily. Exhaustion could set in“, Ed Moya, senior market analyst at Oanda, told Bloomberg.

Indeed, there is reason to think that the energy sector could be overheating.

So far this year until June 7, only one S&P500 sector can claim significant gains–energy–and it’s a lot up: the sector’s favorite benchmark, the SPDR Energy Select Sector Fund (NYSEARCA:XLE) gained 56.3%. Utilities is the only other sector in the green, but the sector’s 2% year-to-date gain is nothing out of the ordinary. In contrast, the S&P 500 is going through a Annus horribilishaving lost 14.8% since the beginning of the year.

Another metric also suggests that oil prices (and inventories) could be close to overbought territory.

The long-term average gold-oil ratio is that one ounce of gold would buy 16.53 barrels of oil. Each time an ounce of gold bought more than 16.53 barrels of oil, it meant either oil was cheap or gold was expensive. Conversely, oil was considered expensive or gold cheap whenever an ounce of gold would buy less than 16.53 barrels.

Related: Oil Prices Fall on Small Crude and Gasoline Inventory Building

by Morgan Stanley Martijn Rats and Amy Sergeant said that although the oil-gold ratio has always been a poor predictor of future oil prices, it may still be of interest to investors looking for advice on the direction of oil prices. Knowledge can help investors determine whether to buy more oil and sell their gold, or vice versa. The current gold-oil ratio of 15.61 suggests that the current WTI price of $118.30/bbl is slightly higher and should fall to around $117.71/bbl.

Yet another metric suggests oil and gas stocks are getting expensive.

Professor Robert Shiller of Yale University invented the P/E of Shiller to measure market valuation. The Shiller P/E is a more reasonable indicator of market valuation than the P/E ratio because it eliminates the fluctuation in the ratio caused by variation in profit margins over economic cycles. Although valuations are a poor timing tool in the short term, they are an excellent predictor of long-term stock prices. The Shiller P/E ratio reliably predicted stock performance over 10 years.

The Energy sector currently has a Shiller P/E of 37.20, with only Real Estate (47.10), Consumer Cyclical (43.90) and Technology (39.10) being more expensive.

For comparison purposes, the S&P 500 has a Shiller P/E of 32.10 but its regular P/E ratio of 20.8 is slightly higher than the Energy’s of 20.7.

That said, there are still good deals in the oil and gas sector. Here are five.

Market cap: $14.9 billion

P/E ratio (front): 5.52

Cumulative returns since the beginning of the year: 68.2%

Ovintiv Inc.(NYSE: OVV) is a Denver, Colorado-based energy company which, together with its subsidiaries, is engaged in the exploration, development, production and marketing of natural gas, oil and liquids. natural gas.

The Company’s principal assets include Permian in West Texas and Anadarko in West Central Oklahoma; and Montney in northeastern British Columbia and northwestern Alberta. Its other upstream assets include Bakken in North Dakota and Uinta in central Utah; and Horn River in northeastern British Columbia and Wheatland in southern Alberta.

Last month, Mizuho upgraded the OVV to $78 from $54 (good for 32% upside from the current price), citing improved tailwinds.

Market cap: $6.8 billion

P/E ratio (front): 5.73

Cumulative returns since the beginning of the year: 64.6%

Another E&P company from Denver, Colorado, Civitas Resources, Inc. (NYSE: CIVI) is focused on the acquisition, development and production of oil and natural gas in the Rocky Mountain region, primarily in the Wattenberg field of the Denver-Julesburg Basin of Colorado.

As of December 31, 2021, it had proven reserves of 397.7 MMbbls comprising 143.6 MMbbls of crude oil, 106.0 MMbbls of natural gas liquids and 888.5 Bcf of natural gas.

Benjamin Halliburton, chief investment officer at Building Benjamins, recommended buying Civitas, saying the company’s strong balance sheet and increased free cash flow could propel the stock to $110 next year (up 31 .7%), and that its annual dividend could reach $6 more. $1.63 currently.

Market cap: $3.9 billion

P/E ratio (front): 6.26

Cumulative returns since the beginning of the year: 53.4%

Enerplus Corporation (NYSE:ERF)(TSX:ERF), together with its subsidiaries, engages in the exploration and development of crude oil and natural gas in the United States and Canada. The Company’s oil and gas properties are located primarily in North Dakota, Colorado and Pennsylvania; and Alberta, British Columbia and Saskatchewan.

As of December 31, 2021, the company had proven and probable gross reserves of approximately 8.2 million barrels (MMbbls) of light and medium crude oil; 20.7 million barrels of heavy crude oil; 299.3 million barrels of tight oil; 56.2 million barrels of natural gas liquids; 19.7 billion cubic feet (Bcf) of conventional natural gas; and 1,367.9 billion cubic feet of shale gas.

Related: Upward pressure on oil prices will only increase

Scotiabank analyst Jason Bouvier told the Financial Post chose Enerplus as one of Canada’s energy companies with the lowest break-even points (including hedging gains).

Market cap: $65.9 billion

P/E ratio (front): 6.76

Cumulative returns since the beginning of the year: 124.1%

Based in Houston, TX, Western Oil Company (NYSE:OXY) together with its subsidiaries, engages in the acquisition, exploration and development of oil and gas properties in the United States, the Middle East, Africa and Latin America. The Company also has a chemical segment that manufactures and markets basic chemicals, including chlorine, caustic soda, chlorinated organic compounds, potassium chemicals, ethylene dichloride, chlorinated isocyanurates, sodium silicates and calcium chloride; vinyls comprising vinyl chloride monomer, polyvinyl chloride and ethylene.

Last month, Ecopetrol (NYSE: EC) announced an agreement to develop four blocks in deep water offshore Colombia with Occidental Petroleum. Ecopetrol has revealed that it will take a 40% stake in the blocks while Occidental subsidiary Anadarko Colombia will hold a 60% stake and serve as operator.

  • Canadian natural resources

Market cap: $78.1 billion

P/E ratio (front): 7.19

Cumulative returns since the beginning of the year: 55.3%

Canadian Natural Resources Limited (NYSE: CNQ) acquires, explores, develops, produces, markets and sells crude oil, natural gas and natural gas liquids (NGLs).

As of December 31, 2020, the company had total proven crude oil, bitumen and NGL reserves of 10,528 million barrels (MMbbl); total proven and probable crude oil, bitumen and NGL reserves were 13,271 million barrels; SCO’s proven reserves were 6,998 MMbbl; SCO’s total proven and probable reserves were 7,535 million barrels; proven natural gas reserves were 12,168 billion cubic feet (Bcf) and total proven and probable natural gas reserves were 20,249 Bcf.

Last month, CNQ reported strong first-quarter earnings and cash flow, coupled with previously announced dividend and buyout plans. As with most peers, a good Q1 impression is likely to be followed by even better Q2 results.

By Alex Kimani for Oilprice.com

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Felix J. Dixon