Company / Analytics

Analytics, 07 January 2022

Top Oil Stocks to Consider for 2022

Despite the continuing Covid-19 related chaos, the energy sector could bode well for investors. When coronavirus first struck in 2020, oil prices slipped to below zero, an unprecedented circumstance as the global economy ground to a halt.

But a year of strong recovery followed in 2021 with the S&P 500 Energy Sector Index rising 50.6% in the last year. This upward trend is expected to continue in 2022, owing to global economic recovery and improved end-user fuel use. Furthermore, the recently presented $1 trillion massive infrastructure program might be a big driver for the U.S. market, favoring higher crude prices, despite new worries sparked by the Omicron variant.

Oil stocks appear to be well-positioned for a post-pandemic recovery, despite investments in electric vehicles. Not least because most of the cars available on the roads still use fossil-based fuels plus an improving macroeconomic background and transportation across the world.

The International Energy Agency predicts that global oil demand will increase by 3.3 million barrels per day next year to 99.5 million barrels per day. That would match the previous demand record in 2019, before the pandemic. In particular, the agency notes that demand for road transportation fuels and petrochemicals will continue to post healthy and the world could consume more oil in 2022 than ever before.

If you are interested in recovery stocks, you may consider adding some of these top oil stocks to your portfolio. However, investors should be aware that 2022 may be a make-it-or-break-it year, where the market may correct or crash.

Top Oil stocks to consider

Exxon Mobil (XOM)

From a recent CNN Business report, the “International Energy Agency predicts that global oil demand will increase by 3.3 million barrels per day next year to 99.5 million barrels per day. That would match the previous demand record in 2019, before the pandemic.”

It added to the thesis, noting that “it expects demand for road transportation fuels and petrochemicals to continue to post healthy growth.” The end result is that the “world could consume more oil in 2022 than ever before.” While a counterintuitive hypothesis in light of growing efforts to go green, the forecast would be welcome news to big oil firms like Exxon Mobil.

For years heading into the Covid-19 crisis, XOM suffered — as did many other oil stocks — as disruptive events and declining relevancy hurt investor sentiment. And to be clear, XOM has still not recovered to its price point just before the coronavirus ruined everything.

However, it’s important to point out that society has never quite returned to normal. When it does, the resultant boon in activity could send XOM shares flying.

Chevron (CVX)

Chevron is one of the best-positioned global integrated oil companies for a long-term production ramp-up. The company has one of the greatest project pipelines in the business, given its prime position in the lucrative Permian Basin. With its purchases in the Permian and Marcellus basins, the organization has positioned itself as the second-biggest oil corporation in the U.S.

Because of its solid financial position and cash flow generation capabilities. The firm has sufficient liquidity to continue paying quarterly dividends to its stockholders, as it has done in the past. During the third quarter, the oil giant paid a $2.6 billion dividend and produced $6.7 billion in free cash flow.

Last month, the company unveiled its capital strategy through 2022. It forecasted $15 billion in capital and exploration expenditures, up 20% from 2021 levels. Also positive is Chevron’s announcement that it will expand its share repurchase forecast to $3-$5 billion per year.

Chevron’s growth prospects have also been praised by Wall Street analysts, who have given the company a Strong Buy rating based on 14 Buys and 3 Holds. The average Chevron stock prediction of $135.06 represents 11.2% increase in value from current levels.

EOG Resources, Inc. (EOG)

EOG Resources is a significant upstream energy company with activities in a number of lucrative areas like the Permian Basin, which is the most prolific oil resource in the United States. The company’s operations are spread across the United States, China, Canada, and Trinidad.

The firm has a strong growth potential, a large inventory of drilling prospects, strong returns, and a well-disciplined management team. It owns a lot of land in oil shale areas including the Permian, Bakken, and Eagle Ford. EOG Resources has extensive undrilled premium sites in Delaware.

On the financial front, EOG reported $2.16 in adjusted profits per share in the third quarter, increasing 402.3% from the year-ago quarter. Increased production volumes and higher commodity prices fueled the profitability. EOG’s bottom line should continue to benefit from rising oil prices and higher production. Coming to the company’s dividend history, it increased the regular dividend by 82% to $3.00 per share. A special dividend of $2 per share was also declared.

Wall Street analysts have given EOG Resources a Strong Buy consensus recommendation, with 19 recent ratings, including 16 Buys and 3 Holds. The company is now trading at $95.35, with an average EOG price target of $115.05 implying 20.7% gain from that point.

Pioneer Natural (PXD)

Another top pick on this list is Pioneer Natural Resources. The company is a major upstream energy company that specializes in the Permian Basin, Eagle Ford Shale, Rockies, and West Panhandle.

The business recently completed a $3.1 billion asset sale in the Delaware Basin, making it a pure-play operator in the lucrative Midland Basin. In addition, Pioneer Natural is flush with cash. During the third quarter, it generated $1.1 billion in free cash flow. Also, the corporation boosted its quarterly dividend by 100% to $3.02 per share, which will be paid in the fourth quarter.

Furthermore, Pioneer Natural’s production prospects appear to be promising. Total production is expected to be in the range of 613-619 MBoe/d in 2021, up from 367.3 MBoe/d in 2020. Oil production is expected to range between 356-359 thousand barrels per day.

Pioneer Natural has a Strong Buy consensus rating, based on 15 Buys and 5 Holds. As for price targets, the average PXD stock price prediction of $230.20 implies 20.4% upside potential from the current levels.

Phillips 66

After you pull crude oil or natural gas out of the ground, you need to do something with it in order to make it usable. That’s where the downstream or refining sector comes in. The base commodity is “cracked” under pressure into various fuels and other materials. One of the largest independent oil refiners in the U.S. is Phillips 66 (PSX, $78.32).

The key for PSX is that the firm isn’t just focused on producing gasoline for cars. It also has a hefty dose of chemicals production via its joint venture with Chevron (CVX). Here, Phillips is a major producer of high-density polyethylene (HDPE) plastic, polypropylene plastic and various other chemicals. For PSX, this focus on chemicals production rather than just transportation fuels has paid benefits.

As the economy has started to recover and plastics demand has risen, PSX has been able to turn this focus into better earnings. In the first three quarters of 2021, Phillips 66 managed to produce adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in its chemicals segment of $1.9 billion. That’s roughly double what it produced during all of 2020 and it still has one quarter in the fiscal year still left to report.

Its refining and midstream businesses have also seen big increases in earnings this year. And speaking of those midstream assets, PSX is undergoing a major transformation. Last fall, the firm decided to swallow all the remaining public units of Phillips 66 Partners (PSXP) – its master limited partnership (MLP). Thanks to tax changes, the MLP structure doesn’t make sense for many midstream firms anymore. In fact, the tax-step basis for these assets should help shield PSX from more taxes than having the MLP.

Phillips 66 “represents a simplified story and the removal of certain ‘headaches’ can help PSX resonate further with investors as energy markets recover,” says Raymond James analyst Justin Jenkins. He has an Outperform rating on PSX, which is the equivalent of a Buy.

“With the refining outlook likely grinding even higher from here as the world returns to normal, coupled with a strong outlook for the rest of the business, we think PSX is still one of the highest quality long-term stories in our coverage,” Jenkins adds.

All in all, PSX represents a play on rising demand and a growing economy. With its better earnings potential, strong dividends and steady base of earnings, the stock is one of the best energy stocks to buy for the new year.

ConocoPhillips

According to its website, “ConocoPhillips is an independent exploration and production (E&P) company headquartered in Houston, Texas.” The company goes on to describe its operations in “crude oil, bitumen, natural gas, natural gas liquids and liquefied natural gas on a worldwide basis,” and its “operations and activities in 14 countries.”

COP represents one of the biggest oil stocks levered to the upstream component of the energy supply chain. As the category name suggests, upstream companies are at the top of the chain, searching for oil deposits from which other institutions below benefit from “trickle-down economics.” Upstream firms represent one of the riskiest oil stocks because of factors such as potential geological, geopolitical, operational and increasing social impediments.

ConocoPhillips (COP, $75.65) took its lumps earlier than its fellow energy stocks and now it is reaping the rewards. Back when oil prices crashed in 2014-2015, COP was the first major oil producer to get “lean and mean.” That meant slashing its dividend, selling underperforming assets, living within its cash flows and focusing on low-cost shale assets.

As a result, Conoco has been able to navigate subsequent oil crashes and downturns with relative ease – including in 2020. While COP did lose money along with the rest of the energy industry, it was still able to keep its dividend going through operating cash flows. In fact, it even hiked its quarterly dividend payment by 2.4% in October 2020.

With energy prices rising, COP has continued to be quite successful in the current environment. The firm reported Q3 2021 earnings of $2.4 billion, or $1.78 per share, and more than $2.8 billion in free cash flows.

Even better is that Conoco has managed to take advantage of other energy stocks misfortunes to better itself. For instance, in late 2021, COP used its cash on hand to buy all of Royal Dutch Shell’s (RDS.A) Permian Basin assets, which included around 225,000 net acres and producing properties and 600 miles of operated crude, gas and water pipelines and infrastructure.

Analysts are certainly upbeat about the appeal of COP. “We believe the new framework gives most investors what they have been asking for by delivering minimal production growth, a solid base dividend, strong share repurchases and opportunistic variable dividends,” say Truist Securities analysts Neal Dingmann and Jordan Levy, who rate the stock a Buy.

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