These 2 oil stocks are the “top picks” ahead of earnings, analyst says
2022 has brought us crazy volatility and some serious ripples in commodity markets. Rising inflation is putting downward pressure on demand, but rising commodity prices, especially oil and other fuels, are partly to blame for that inflation – and consumers simply can’t reduce any fuel demand.
At the same time, supply chains are still tangled and the return of tough lockdown policies in China is impacting both supply and demand in the world’s second-largest economy – and putting further pressure on major export hubs. This adds to a picture of slowing overall demand growth in 2022.
But the key turning point for commodity markets in 1Q22 came in Eastern Europe, where Russia’s invasion of Ukraine put a host of headwinds on exports from both countries. Recall that Russia is one of the largest producers of hydrocarbons in the world, while Ukraine is heavily involved in the transport of natural gas, and the two countries together account for some 25% of world wheat exports.
Against this backdrop, Evercore analyst Stephen Richardson selected two oil producers as his “best ideas” in the current environment and ahead of their upcoming earnings releases. And he is not alone in his optimistic attitude. According to the TipRanks database, both tickers carry a Strong Buy consensus rating relative to the rest of the street. Let’s take a closer look.
Conoco Phillips (COP)
We’ll start by looking at ConocoPhillips, one of the largest companies in the energy sector, with a market capitalization of over $118 billion and over 1.5 million barrels of oil equivalent produced daily last year. . The company operates in 14 countries and has annual revenue of $46 billion.
ConocoPhillips is committed to returning profits to shareholders, and it had plenty to work for in 2021. The company posted earnings of $6.07 per share last year, compared with a loss of $2.51 per share l previous year, and returned $6 billion to shareholders. through dividends and buybacks. The company has a current dividend payout of 46 cents per common share, annualizing to $1.84 and yielding 2%. For 2022, ConocoPhillips has already announced its intention to return up to $8 billion to shareholders.
The energy industry is dripping with cash, as well as oil, and ConocoPhillips ended last year with $5.8 billion in cash and liquid assets. The company saw year-over-year revenue growth in every quarter in 2021, and its full-year revenue was up 145% from 2020. Investors have reacted, and in a general market environment that has seen the S&P 500 down 10% so far. this year, COP shares are up 36%.
All of this prompts Richardson to take an optimistic stance on the company, as he writes: “At COP, we see upside cash flow expectations and a portfolio that will benefit from domestic and global natural gas trends. with the integration of recent acquisitions. COP remains a key long-term holding thanks to the certainty of its return framework and strong upstream cash flow generation. The stock was strong in Q1 and rebounded +40%, benefiting from rising commodity prices and a strong buyback program…”
Evercore analyst predicts a strong first quarter for COP, and we’ll see on May 5th how that holds up. In the meantime, he rates the stock as an outperformer (i.e. a buy) and his price target of $122 suggests a 25% year-on-year upside. (To see Richardson’s track record, Click here)
Wall Street finds itself in broad agreement with Richardson’s outlook here. This stock has 14 recent ratings, including 12 Buys and only 2 Takes, for a strong Buy consensus rating. The shares are priced at $91.66 and their average target of $126.54 implies a 38% upside. (See COP stock forecast on TipRanks)
Diamondback Energy (FANG)
The second stock we’ll look at, Diamondback, may not have ConocoPhillips’ rich history, but the Texas-based company is still a major player in the North American energy scene. Diamondback is a $22 billion hydrocarbon production company operating in the Permian Basin of its home state of Texas, where it generated more than 375,000 barrels of oil equivalent per day in 2021. During in the last quarter of the year, production was on average slightly higher, at 387,000 barrels per day.
Diamondback will release its 1Q22 results on May 3, but we can look back to 4Q21 and full-year results to get a sense of where the business is at.
The company’s strong production generated some $3.94 billion in operating cash flow last year, including $2.42 billion in free cash flow. At the end of last year, the company had 1.78 billion barrels of oil equivalent in proven reserves, a 36% year-over-year gain. Of this, 52% is oil and the rest is natural gas and liquid gases. Diamondback’s quarterly revenue has grown steadily since 2Q20 and reached $2.02 billion in 4Q21. Quarterly EPS, at $3.63, easily beat the forecast of $3.37.
Looking ahead, Diamondback is targeting daily production of 369-376,000 barrels of oil equivalent for 2022 and expects to generate $5.8 billion in operating cash. These forecasts are in line with the actual figures for 2021 and, with higher prices in the oil markets, they will automatically generate higher revenues.
Diamondback used its strong cash flow to fund a growing dividend. The most recent statement saw the company increase the quarterly payout by 20%, to 60 cents per common share. This cancels out at $2.40 and gives a return of around 2%. The company has publicly pledged to return 50% of cash to shareholders.
Richardson’s comments on Diamondback emphasize the company’s ability to produce and return to investors: “Execution and cost control are critical elements of E&P business in any environment and the 1Q update should highlight how FANG can drill wells faster at a lower total cost than most in the Permian Williston assets were still in the mix last quarter, so 1Q should be a clearer representation of the production and cash margins.In addition, management last quarter suggested that it would continue to target a base dividend payout of $3/sh (annualized) and could achieve this by the end of 2022 through modest quarterly increases.
“FANG has lagged the industry since the start of the year and we expect strong execution, a well-insulated model of oilfield inflation and rising shareholder returns following the results of the first quarter to allow the title to reassert itself”, summed up the analyst.
Consistent with these comments, Richardson rates FANG as an outperformer (i.e. a buy) and sets a price target of $170, indicating a potential for 31% stock appreciation over the year at to come.
Wall Street definitely agrees with this bullish stance. FANG stock has no less than 20 recent reviews, and these break down into 18 buys and 2 holds to support the Strong Buy consensus view. The average price target stands at $179.45, up approximately 39% from the current trading price of $129.47. (See FANG stock forecast on TipRanks)
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Warning: The opinions expressed in this article are solely those of the analysts featured. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.