Oil prices are rising – these eight stocks are always good deals for long-term investors

The combination of underinvestment in new oil wells and growing demand underscores what could be a long period of high energy commodity prices. Meanwhile, many oil and gas stocks are still trading at low valuations relative to expected earnings despite an industry-wide recovery that dates back to late 2020.

Although the energy sector of the S&P 500 SPX,
-0.13%
is the only one to rise this year, investors still appear to be in the early stages of a lucrative multi-year cycle.

Simon Wong, analyst at Gabelli Funds in New York, and Charles Lemonides, chief investment officer at ValueWorks in New York, each named their favorite oil stocks in interviews. These companies are listed below.

Underinvestment is good for the oil industry and investors

On March 2, Sam Peters, portfolio manager at ClearBridge Investments, provided this chart for this article which featured two of his energy stock picks:

On the left, the graph shows that oil industry capital spending had increased during previous periods of low supply. But the right side of the chart shows that capital spending fell very low last year as inventories fell.

Oil producers had already been stung by the price crash that began in 2014. But action during the first pandemic shutdowns in 2020 briefly took first-month contract prices below zero. These experiences have made oil company executives reluctant to make typical capital expenditure commitments at a time of high demand. The focus is still on maximizing cash flow and returning cash to investors through dividends and share buybacks.

In the previous article, Peters recommended two stocks: EQT Corp. EQT,
-0.26%,
which increased by 50% from March 1 (the day before the publication of the article with its recommendations) to May 10, and Pioneer Natural Resources Co. PXD,
+0.91%,
which increased by 4%. These price increases exclude dividends – Pioneer’s dividend yield is 6.96%.

We don’t need $100 oil. If oil stays above $80, these companies can still produce plenty of free cash that they can return to shareholders.


— Simon Wong, energy sector research analyst at Gamco.

Oil prices have been quite volatile lately, with so many different forces at play, including Russia’s invasion of Ukraine, which directly disrupted oil markets; China’s aggressive city closures to stifle new coronavirus outbreaks; and the reopening of travel in many markets around the world, including the United States. These and other factors helped drive up the price of West Texas Intermediate CL.1 crude oil,
+0.58%
to swing as much as 13% from an intraday high ($111.37 a barrel on May 5) to an intraday low ($98.20 on May 11) this month alone.

Wong estimated that at the start of 2022, global demand for crude oil ranged from 100 to 101 million barrels per day, while oil was produced at a rate of around 98.5 barrels per day.

WTI closed at $99.76 on May 10, down from $75.21 at the end of 2021.

Wong said new sources of oil in the United States over the past 10 years have been mostly “short-term supply growth” because “you lose 50% to 70% in the first year” of oil exploitation. a shale well.

“The United States can bring back the supply,” he said. But that hasn’t started yet, because “shareholders want operators to be more disciplined.” Wong also pointed to a difficult political environment for building pipelines, increasing regulations, and difficulty in borrowing from banks, all of which increase the cost of developing new sources.

Overall, the oil scene is “bad news for consumers but good news for investors,” Wong said. “We don’t need $100 oil. If oil stays above $80, these companies can still produce a lot of free cash that they can return to shareholders,” he added.

Preferred Oil Stocks

Wong said Canada was a friendlier market for U.S. investors because Canadian wells tend to last 20 to 25 years, according to his estimate.

Among Canadian oil producers, Wong likes Suncor Energy Inc. SU,
-0.90%

SU,
-0.58%
and Meg Energy Corp. MEG,
-1.22%
plays on free cash flow. Based on May 10 closing stock prices and consensus free cash flow estimates for the next 12 months among analysts surveyed by FactSet, Suncor’s estimated free cash flow yield is 18.28%, while the estimate for Meg Energy is 25.68%. These figures are very high, compared to consensus estimates of 5.07% for the S&P 50 and 11.15% for the energy sector of the S&P 500.

Among the American producers he likes are Exxon Mobil Corp. XOM,
+0.45%
in the long term, in part because of its large investment in offshore development in Guyana, with a potential for developing reserves of 10 billion barrels, according to its estimate.

Wong also favors two oilfield maintenance giants: Schlumberger Ltd. SLB,
+1.72%
and Halliburton Co. HAL,
-0.37%.

Lemonides pointed to “a huge opportunity for investors to come in today”, after such a long period in which investing in production was not economically feasible. His advice is to look beyond the current “fluctuations” in the energy market, as “the overall direction of economic growth is likely to be strong”.

He listed three oil stocks he sees as heavily discounted now — all three emerged from pandemic-induced bankruptcies:

  • Whiting Petroleum Corp. WLL,
    -1.87%
    is a shale oil producer that trades for just three times the consensus earnings estimate for the next 12 months among analysts polled by FactSet. When the company filed for bankruptcy in April 2020, it had approximately $3 billion in debt. The company’s market cap is down to just $2.9 billion. Even though the forward C/E ratio is so low, Lemonides believes the company will earn more than analysts expect.

  • Valaris SA VAL,
    +1.03%
    is an offshore driller who emerged from pandemic-era bankruptcy. Its market capitalization is now $3.9 billion, and Lemonides said the company’s drillship fleet was built at a cost of around $20 billion at a time when oil prices fluctuated between $85 and $100. Now that oil is back in that range, “a significant percentage of the fleet has been back to work and demand is growing every day,” he said.

  • Tidewater Inc.TDW,
    +0.10%
    operates a different type of fleet that transports supplies to and from offshore platforms. The company also serves the offshore wind power generation industry. The company’s market capitalization is $835 million, about a third of what it would cost to replace its increasingly busy fleet, according to Lemonides.

Here’s a summary of forward P/E ratios (excluding Tidewater, which is expected to post net losses in 2022 and 2023) and the opinions of analysts polled by FactSet on the eight stocks discussed by Wong and Lemonides. The table uses the Canadian stock symbols for Suncor and Meg Energy; share prices and targets are in local currencies:

Company

Teleprinter PER before Share notes “buy” Closing price – May 10 Consensus price target Implied 12-month upside potential

Suncor Energy Inc.

SU,
-0.58%

6.5

62%

44.71

51.89

16%

MEG Energy Corp.

MEG,
-1.22%

5.3

64%

18.63

24.93

34%

ExxonMobil Corporation

XOM,
+0.45%

9.4

45%

85.02

98.46

16%

Schlumberger AG

SLB,
+1.72%

18.1

88%

37.89

50.03

32%

Halliburton Co.

HAL,
-0.37%

16.3

79%

34h30

46.07

34%

Whiting Petroleum Corp.

WLL,
-1.87%

3.2

56%

72.53

100.00

38%

Valaris Ltd.

VAL,
+1.03%

25.5

100%

52.40

71.71

37%

Tidewater Inc.

TDW,
+0.10%

#N / A

50%

20.10

6:50 p.m.

-8%

Source: FactSet

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