Top 5 High-Flying Oil Stocks Defying Wall Street Chaos – February 23, 2022

Wall Street has suffered setback after setback since the start of this year, pushing both major indices into correction territory. This contrasts with the stunning returns U.S. stock markets have provided during the pandemic-scarred years of 2020 and 2021. High volatility and daily market fluctuations may continue in the near future.

However, one sector, namely the oil and energy sector, has so far proven to be immune to market volatility. It will be prudent to invest in stocks in this sector that have been flying high year-to-date and have favorable Zacks rankings. Five of them are Conoco Phillips (COP free report), Occidental Petroleum Corp. (OXY free report), Marathon Oil Corp. (RRM free report), Marathon Petroleum Corp. (MPC free report) and APA Corp. (PAA free report).

Wall Street under pressure

Since the start of 2022, Wall Street has faced massive volatility. Soaring inflation, which is at a nearly four-decade high, forced the Fed to decide to end the quantitative easing program and raise the benchmark interest rate in March, for the first time in three years. Several economists and financial experts fear that the Fed will raise its rate by 50 basis points four times this year or by 25 basis points seven or eight times this year.

In addition, the situation has worsened over the past two weeks as geopolitical conflicts between Russia and Ukraine have intensified. On February 21, Russia declared the independence of two mob-controlled parts of Ukraine and its troops entered these territories. This forced the UK and the US to impose financial sanctions on Russian banks and financial institutions. Germany has stopped commissioning a crucial gas pipeline project.

Consequently, on February 22, the Dow Jones fell 482.57 points, or 1.4%, to close at 33,596.61, its lowest level since June 18. The S&P 500 slid 1% to end at 4,304.76, its lowest close since Oct. 4. The Nasdaq Composite lost 166.55 points or 1.2%, to end at 13,381.52.

The Nasdaq Composite entered correction territory at the end of January. On February 22, the S&P 500 entered the correction zone for the first time in 2 years. Year-to-date, the Dow Jones, S&P 500 and Nasdaq Composite have fallen 7.5%, 9.7% and 14.5%, respectively.

The oil-energy sector is flourishing

Despite high volatility, the oil sector has been able to thrive so far. This sector suffered a bloody blow in 2020 as the global coronavirus outbreak forced the world to impose lockdowns, especially travel restrictions. As a result, the price of oil plunged to historic lows.

However, the situation began to take a positive turn once global economies, particularly the United States, began to reopen. The nationwide rollout of COVID-19 vaccines has resulted in a faster-than-expected reopening. Strong demand for crude oil following the removal of travel restrictions has led to a spike in oil prices.

OPEC’s decision to maintain production quotas also led to an imbalance between supply and demand, driving the northward movement in the price of oil. In addition, the recent conflict between Russia and Ukraine has pushed the price of oil to its highest level in 2 years.

The SPDR Energy Select Sector (XLK), one of 11 major sectors in the benchmark S&P 500, jumped 20.6% year-over-year and is the only sector to trade green so far in 2022. By 2021, XLE had jumped 53.3% and had become the top performer on the S&P 500 index.

Our top picks

We narrowed our search to five oil stocks that have emerged since the start of the year. These stocks have strong growth potential for 2022 and have seen positive earnings estimate revisions over the past 30 days. Finally, each of our picks sports a Zacks Rank #1 (Strong Buy). You can see the full list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year-to-date.

Image source: Zacks Investment Research

Conoco Phillips holds a large portion of the acres in the three major unconventional areas, namely the oil-rich Eagle Ford Shale, Delaware Basin and Bakken Shale. COP also has a foothold in Canada’s oil sands resources and is exposed to liquefied natural gas developments.

ConocoPhillips has announced an agreement to buy all of Royal Dutch Shell’s assets in the prolific Permian. The agreement reflects COP’s goal to expand its presence in the Permian. The transaction is highly accretive and involves the acquisition of approximately 225,000 net acres in the heart of Delaware’s central basin.

ConocoPhillips forecasts a profit growth rate of 62.1% for the current year. The Zacks consensus estimate for current-year earnings has improved 13.4% over the past 30 days. COP’s share price has jumped 21.7% since the start of the year.

western oil continues to increase hydrocarbon production volumes from its high-quality assets and to reduce outstanding debt through proceeds from the sale of non-core assets. The acquisition of Anadarko, infrastructure reinforcement investments and its exposure to the Permian Basin continue to boost OXY’s performance.

Occidental Petroleum hit the $10 billion divestment target through the sale of non-core assets. Its cost management initiatives will increase margins in the future. OXY is also working to reduce emissions and is aiming for net zero emissions by 2050.

Occidental Petroleum forecasts a profit growth rate of 81.3% for the current year. The Zacks consensus estimate for current year earnings has improved 0.5% over the past 7 days. OXY’s stock price has jumped 32.2% since the start of the year.

Marathon Oil is a major oil and natural gas exploration and production company with operations in the United States and Africa. MRO’s robust operational metrics suggest strong long-term cash flow that should support a higher price for its shares. Wells drilled by Marathon Oil have extremely low oil price breakeven costs and need an oil price of only $35 per barrel to be profitable.

The MRO continues to significantly reduce costs and is striving to achieve a 30% reduction in production costs and general and administrative expenses in 2021 compared to 2019 levels. In addition, Marathon’s significant debt maturities Oil will mostly fall after 2025 and there doesn’t seem to be much risk here.

Marathon Oil has an expected earnings growth rate of 75.8% for the current year. The Zacks consensus estimate for current year earnings has improved 4.9% over the past 7 days. MRO’s stock price has climbed 31.5% since the start of the year.

Marathon Oil is poised for further price gains based on a host of tailwinds. MPC’s $21 billion sale of its Speedway retail business provided the company with a much-needed cash injection. The deal also comes with a 15-year fuel supply agreement under which Marathon Petroleum will supply 7.7 billion gallons of gasoline annually to 7-Eleven, ensuring a stable revenue stream.

MPC’s exposure to more stable cash flows from the logistics segment diversifies the revenue stream and provides protection against volatility in the refining business. Consequently, Marathon Petroleum is poised for significant capital appreciation and is considered a preferred downstream operator to own now.

Marathon Petroleum has an expected earnings growth rate of over 100% for the current year. The Zacks consensus estimate for current-year earnings has improved 5.5% over the past 30 days. MPC’s share price has appreciated 18.2% since the start of the year.

PAA has a geographically diverse reserve base and a high quality drilling inventory. The company’s increased focus on the Permian Basin, known for its high internal rates of return, is the real driver. APA’s slew of discoveries in offshore Suriname, through its joint venture with TotalEnergies, is another positive catalyst for the company.

Over time, Suriname is expected to become one of APA’s major assets with significant cash flow potential. APA’s strong free cash flow generation capability, coupled with aggressive cost management initiatives, should help it meet its debt reduction target and meet its debt target of less than 1, 5 times the debt/EBITDA ratio.

APA forecasts a profit growth rate of 64.3% for the current year. The Zacks consensus estimate for current-year earnings has improved 20.4% over the past 30 days. APA’s share price is up 15.4% year-to-date.


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Felix J. Dixon