These 3 oil stocks are poised for strong gains
Russia’s war in Ukraine will not only impact Russian soldiers and the Ukrainian people. Western nations have imposed heavy sanctions on Russia, cutting it off from most international banking systems, restricting its access to US dollars and preventing its physical export of valuable raw materials. The latter may be the key. Russia is the world’s largest exporter of natural gas and the second largest exporter of crude oil, and it is clear that global commodity markets, especially hydrocarbon markets, are in for a nasty shock.
However, not everyone will suffer from it. If Russian oil companies face tough times, we must remember that the demand for oil will not go away. If consumers don’t get it from Russia, they’ll buy it somewhere – and now we have to remember that Texas produces about 43% of all American hydrocarbon production, and that state is one of of the world top five oil producers, in the same league as Russia and Saudi Arabia.
With that in mind, TipRanks 5-star Goldman Sachs analyst Neil Mehta picked three oil stocks he sees as winners going forward. These are buy-listed stocks with great upside potential, and closer examination may help explain why Mehta finds them compelling. Let’s dive into it.
Diamondback Energy (FANG)
Goldman Sachs’ top pick is Diamondback Energy, a Texas-based player very active in the richly productive Permian Basin. The Permian has been the center of America’s oil boom in recent years and has put Texas back on the world map for oil producers. Diamondback’s production reflects the productivity of the region; the company recorded daily production of 387,100 barrels of oil equivalent in 4Q21. This figure was slightly higher than the annual average of 375,300 barrels per day.
High production and high prices resulted in high revenues and profits. Diamondback’s revenue has grown steadily since rebounding from the “corona bottom” in 2Q20. In the recent fourth quarter, Diamondback reported revenue of $2.02 billion, up a staggering 162% year-over-year. EPS was $3.63 per diluted share, based on just over $1 billion of net income. That was well above forecasts of $3.37, and like revenue, Diamondback’s EPS has been rising steadily for nearly two years now.
This company has long pledged to return half or more of its free cash flow to shareholders, through dividends and buybacks. It stuck to that policy and recently declared a cash dividend of 60 cents per common share. This represents a 20% increase from last quarter’s statement, and the annualized payout of $2.40 yields a return of 1.9%. The company also repurchased more than 3.85 million shares during the period, spending $409 million to do so.
In Diamondback’s coverage for Goldman Sachs, Mehta writes, “We continue to see favorable capital returns and debt reduction in 2022 given our estimates of $6 billion in FCF (25% yield) based on our bullish outlook on commodity prices. We expect the company to allocate above its minimum of 50% FCF to shareholders (we see 13% returns assuming a 60% FCF payout) in current commodity prices, above above mid-cycle, and see greater allocation going forward as the balance sheet continues to strengthen.
To that end, Mehta assesses that Diamondback shares a buy, while its price target of $188 indicates upside potential of around 51% this year. (To see Mehta’s track record, Click here)
Of 20 recent analyst reviews on FANG, 19 are positive, suggesting a buy, versus a single hold. This gives the stock its consensus Strong Buy rating, and the mid-price target of $156.63 indicates upside potential of around 26% from the current trading price of $124.56. (See FANG stock analysis on TipRanks)
The next stock on Goldman Sachs’ radar is Ovintiv, one of the large-cap players in the North American hydrocarbon industry. Ovintiv, which moved from Canada to the United States just two years ago, is an $11 billion company with major assets in Montney, on the Alberta-British Columbia line, in Anadarko, Oklahoma and the Permian Basin of Texas. In addition, the company has smaller interests in the Bakken formation in North Dakota and the Uinta Basin in Utah. In short, Ovintiv controls most of the most productive oil regions in North America.
This portfolio of assets has driven Ovintiv’s strong earnings over the past two years. The company posted six consecutive sequential gains in quarterly revenue, along with strong profits. In the most recently reported quarter, for 4Q21, the company had net income of $1.4 billion, as well as cash flow from operating activities of $3.1 billion and cash flow $1.7 billion available. Ovintiv made further progress in reducing its debt, repaying some $2.3 billion. Management expects to hit its net debt target of $3 billion by the second half of this year, as long as oil prices stay above $85 a barrel. Given that Oil is consistently trading above $120 right now, this is a feasible prospect.
In addition to paying off its debt, Ovintiv also increased its dividend, raising the payout to 20 cents per common share quarterly, or 80 cents annualized. This gives the dividend a yield of 1.7%.
Covering Ovintiv for Goldman Sachs, Mehta reminds investors that there are significant gains in store for the stock in 2022. The analyst notes OVV has Buy, and his price target of $71 implies an upside of around 65 % over the one-year horizon.
Supporting his bullish stance, Mehta writes, “Returns to shareholders will come in the form of share buybacks or variable dividends (we expect a focus on share buybacks given that the company is trading at a discount per relative to its peers), while the remaining FCF will be used for further debt reduction and small complementary acquisitions. We believe the company, in addition to meeting its net debt target, will focus on its ability to offset inflationary pressures through operational efficiencies, and we are considering potential inclusion in the S&P 500 (management noted that it ticked all the boxes with positive Q4 earnings) as another catalyst for stocks to outperform.
Overall, this stock has an analyst consensus Moderate Buy rating, based on 12 reviews with an 8-4 rating favoring Buys over Reserves. The shares are trading at $43.12 and have an average price target of $55.54, up about 29% year over year. (See Ovintiv stock analysis on TipRanks)
Hesse (IT IS)
Last but not least is Hess, a $28 billion hydrocarbon exploration and extraction company headquartered in New York. Hess has a truly global reach, with operations in North Dakota’s Bakken Shale, Gulf of Mexico waters, off the coasts of Guyana and Suriname, in the Libyan Desert and off Thailand and from Malaysia. These operations are known for their high production; in 4Q21, Hess drew 295,000 barrels of oil equivalent daily (excluding Libya, where the political situation remains unstable at best). The Bakken shale gave way, with 159,000 barrels of this production.
Those numbers outpaced rising gas and oil prices to bring Hess its best revenue totals in more than two years. Revenue grew from $1.21 billion in 4Q20 to $2.56 billion in 4Q21, an impressive 112% year-over-year gain. Revenue also exceeded industry forecasts of $2.05 billion. In terms of earnings, Hess generated net income of 85 cents per share, far ahead of the 58 cent EPS loss in the year-ago quarter. 4Q21 net EPS also topped the forecast, beating the estimate by 16%.
Looking ahead, Hess expects its production to increase; the estimate of 330,000 to 340,000 barrels of oil equivalent per day for 2022 represents a 12% to 15% increase over 2021 production figures. In a note of particular interest to investors, Hess announced in February that production on the Liza Phase 2 development, an offshore exploration project in Guyana, South America, had commenced. The company expects this project to reach 220,000 barrels of oil equivalent per day before the end of this year.
Once again, Neil Mehta has the truth in this stock for Goldman Sachs, and he sees plenty of catalysts ahead of him to keep the stock price up. Mehta writes, “We believe the company is uniquely positioned to benefit from: (1) Guyana’s long-term oil growth at low supply costs and (2) our positive outlook for higher oil prices. long-term leading to higher-than-consensus cash flow expectations. to flow. We expect Guyana to drive the next stage of oil growth for HES with ~0.9 mn bpd of gross oil production in 2026E (vs. 120,000 bpd in 4Q21)… With Stage 2 production of Liza now online and the repayment of her remaining $0.5 billion term loan, we see a potential shift in the use of FCF toward capital returns, which may lead to greater equity credit. “
These comments confirm Mehta’s buy rating here, and his one-year price target of $147 implies a 57% upside for HES shares.
The consensus of Wall Street analysts on this one shows that the bullish view is widely shared. There are 11 recent reviews of HES, and these include 10 buys for one retainer. The stock is selling at $93.08 and its average target of $115.82 suggests upside potential of around 24%. (See HES stock analysis on TipRanks)
To find great ideas for oil stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a recently launched tool that brings together all of TipRanks’ stock information.
Warning: The views 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.