Company / Analytics

Analytics, 04 March 2022

Top Energy Stocks to Watch in March 2022

Energy stocks have been in focus as the broader stock market continues to adjust to the conflict between Russia and Ukraine. This is likely due to global sanctions potentially weighing in on Russia’s oil exports. Russian exports make up a sizable 10% chunk of the world’s global oil output. This has been alarming, coming at a time when global energy supplies are already dwindling.

Global oil prices are now surging with Brent crude hitting peaks of around $116 a barrel, its highest since June 2014. Meanwhile, the U.S. West Texas Intermediate crude is holding around the $112 mark, a high last seen in August 2013.

Meanwhile, the Federal Reserve remains steadfast in its plans to raise interest rates later this month, further raising the focus on hot commodities such as oil.

For one thing, oil firms like ExxonMobil and Devon Energy have already seen significant upsides in their stocks. Both are up by more than 20% year to date. This means that investors are constantly looking for the best energy stocks to buy in the stock market today.

The energy sector is composed of companies focused on the exploration, production, and marketing of oil, gas, and renewable resources around the world. Energy sector stocks include upstream companies that primarily engage in the exploration of oil or gas reserves, such as Devon Energy Corp. (DVN). Downstream companies include HollyFrontier Corp. (HFC), which refines and processes oil and gas products for delivery to consumers. Among the industry’s biggest players are Chevron Corp. (CVX) and ExxonMobil Corp. (XOM).

Oil and gas prices have spiked in recent days because due to concerns surrounding the Russian invasion of Ukraine. Brent crude oil prices have jumped to more than $100 per barrel, the highest level since 2014.

Energy stocks, as represented by an exchange-traded fund (ETF)—the Energy Select Sector SPDR ETF (XLE)—have dramatically outperformed the broader market, posting a total return of 46.7% over the past 12 months compared to the Russell 1000 Index’s total return of 9.6%. These market performance numbers and all statistics in the tables below are as of Feb. 22, 2022. Below are the top energy stocks to invest to consider for your portfolio.

1. ExxonMobil Corp.

Despite being the largest energy company in the U.S., Exxon Mobil hasn’t been king in recent years. Lower commodity prices have continued to hurt its shale-oil assets, while the pandemic dented demand for liquefied natural gas (LNG) and other fuels.

But perhaps XOM is ready to reassert itself. Over the past couple of years, Exxon has been cutting costs and selling assets in Asia, Europe and Africa, as well as in the Barnett Shale, allowing it to focus on its best-performing assets. Now, Exxon’s breakeven costs to cover capital expenditures and dividends over the next five years is a meager $35 per barrel – meaning anything past that is pure upside.

In its third quarter, for instance, Exxon generated nearly $6.8 billion in profit, versus a $680 million loss in the year-ago quarter. Cash flows from operations were $12.1 billion, allowing Exxon to not only cover capital investments and its dividend, but reduce its debt. Indeed, results were so good that Exxon pledged to resume its stock-buyback program in 2022.

XOM also has going for it a forward price-to-earnings (P/E) ratio of just 11 that’s in line with the energy sector and well below the broader market, as well as a dividend yield of more than 5%.

For investors naturally drawn to big-yielding blue chips, Exxon looks like one of the best energy stocks of 2022. And the “smart money” certainly agrees, with XOM one of the most popular stocks among the hedge fund crowd.

2. ConocoPhillips

For investors looking to capitalize on rising oil prices and steady demand, ConocoPhillips is worth considering. One of the largest E&P-focused companies in the world, it specializes in finding and producing oil and natural gas and has operations in more than a dozen countries.

ConocoPhillips benefits from scale and access to some of the lowest-cost oil on earth, which includes significant exposure to the Permian Basin via its 2020 acquisition of Concho Resources (NYSE:CXO). With average costs of about $40 per barrel and many of its resources even cheaper, it can make money in almost any oil market environment. The company plans to return its entire market cap in dividends and share repurchases over the next decade as long as Brent Crude prices average only $50 per barrel.

Finally, the company complements its low-cost portfolio with a top-tier balance sheet. ConocoPhillips routinely boasts one of the highest credit ratings among E&P companies, backed by a low leverage ratio for the sector and lots of cash.

Add it all up, and ConocoPhillips has consistently been able to generate positive cash flows while paying out a dividend it’s raised six times since 2015.

3. Phillips 66

Phillips 66 is one of the leading oil refining companies, with operations in the U.S. and Europe. It also has investments in midstream operations – including sizable stakes in two master limited partnerships, Phillips 66 Partners and DCP Midstream (NYSE:DCP) – and in petrochemicals via its CPChem joint venture with Chevron (NYSE:CVX). Finally, its marketing and specialties business distributes refined products and manufactures specialty products such as lubricants.

Thanks to its large-scale, vertically integrated operations, Phillips 66 is among the lowest-cost refiners in its industry. This is the result of both leveraging its integrated midstream network to source lowest-cost crude for refining and petrochemical feedstocks and investing in projects that give it higher margins on the products it makes.

Phillips 66 also boasts a strong financial profile, which includes an investment-grade balance sheet with very manageable debt, plus it has lots of cash on hand. These factors mean it has ample capital to invest in expansion projects – including a surprising focus on renewable fuels.

It’s also been a dividend growth superstar and a share buyback dynamo over the past decade. Investors looking to profit from oil stocks and gain exposure to renewables should give Phillips 66 a close look.

How to analyze oil stocks

The oil industry is inherently risky for investors. While each segment of the industry has a specific set of risk factors, the overall oil business is both cyclical and volatile.

Oil demand generally tracks economic growth. A robust economy can support rising oil prices and oil producer profitability. However, geopolitics and capital allocation also play crucial roles in the industry.

The world’s largest oil-exporting nations include members of OPEC (Organization of the Petroleum Exporting Countries), a cartel that works to coordinate members’ oil policies. OPEC’s actions can significantly affect the price of oil; in 2020, its members slashed prices to persuade Russia to curb production. Within a month, oil futures prices had gone negative, and producers were paying people to take their oil.

Meanwhile, oil companies that operate independently of OPEC can also have an impact on oil prices if they allocate too much or not enough capital to new projects. Since oil and gas assets are developed over a long time, companies cannot quickly increase their supplies in response to favorable market conditions.

Given the volatility of oil prices, an oil company must have three crucial characteristics to survive the industry’s inevitable downturns. These include (i) a strong financial profile with an investment-grade bond rating, significant amounts of cash on hand or ample access to affordable credit, and manageable, well-structured debt maturities, (ii) Low costs of operations or relatively stable cash flow stream, and (ii) Diversification where oil companies operate in more than one geographical region or be at least partially vertically integrated by engaging in several different activities.

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