Which Oil & Gas Stock is Right for You?
Oil prices could breach $100 per barrel once again this year. But which stocks do we think are best-placed to capitalize?
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Guten tag, and welcome to another edition of Investing Intel from the team at ValueTheMarkets!
Across this newsletter you’ll find:
👉 Three stock insights
👉 A news roundup
👉 Investing signals
👉 Fear & Greed
👉 The finest content from ValueTheMarkets
👉 Key dates for your diary
👉 Some fun facts!
What more could you want?
This week we’ve got hydrocarbons on our minds and are thusly turning our attention to the oil and gas industry. It’s a fitting time to focus on this industry, with major players like Saudi oil behemoth Aramco, British-Dutch multinational Shell and Texan giant Exxon Mobil (NYSE: XOM) all having recently reported record annual earnings.
Oil prices have reached historic highs over the past 12 months, climbing beyond $120 per barrel in the wake of the Russian invasion of Ukraine. Prices have since retreated by around 40%, but some analysts seem optimistic that they could breach the triple-figures mark once again.
Those bullish on oil prices cite soaring demand from a resurgent and lockdown-free China, softer than anticipated landings for the US and Eurozone economies and continued supply issues relating to the conflict in Ukraine as drivers for oil price gains in the coming 12 months.
Even if Western economies do find themselves in recession, continued strong demand would likely keep oil prices high. Add to that the fact that oil and gas stocks staged some of the strongest recoveries from the 2008 financial crisis, and the industry is looking ripe for investment right now.
So, which stocks in the oil and gas industry do we think are worth your time?
The Dividend Demon - Pioneer Natural Resources (NYSE: PXD)
Next, we’re getting to know Pioneer Natural Resources (NYSE: PXD), a Texas-based oil and gas outfit with a heavy presence in the Permian Basin.
The business was founded back in 1962 by prospectors Howard Parker and Joe Parsley. The duo imaginatively dubbed their new venture Parker & Parsley, with their surname order having been decided by the flip of a coin. In the spirit of alliteration, Parker & Parsley became a successful Permian Basin-focused outfit.
Eventually, the company merged with MESA Inc, a business with natural gas holdings and offshore drilling expertise, to form another ‘P’: Pioneer Natural Resources.
We like this stock, but things haven’t been so rosy for shareholders over recent months.
The company has seen its share price decline by around 20% over the last six months as declining oil prices impacted revenues and the company disappointed shareholders by dismissing rumours that it was set to acquire Range Resources (NYSE: RRC) and diversify beyond the Permian Basin.
Even so, the business remains in a strong position to benefit from future increases in oil prices. That’s because of its consistent growth when it comes to production levels, as well as the company’s solid track record as a low-cost operator.
The modern technology and high level of operational efficiency employed by the company would allow it to benefit from higher oil prices more than many competitors, while it will also insulate the business against difficulties in leaner periods.
Finally, it’s well worth bearing in mind that this stock comes replete with a mammoth dividend. Pioneer Natural Resources has a dividend yield of 13.86%, well above the average for the industry. The figure has made the company the highest-yielding dividend stock in the S&P500.
Pioneer’s dividend is not guaranteed to remain at such a generous level, as it’s composed of a base dividend and a variable element derived from how much free cash flow is generated by the business. However, the policy’s potential for significant dividend yield has already been demonstrated and further shareholder rewards could be sizeable.
To sum up, we like Pioneer Natural Resources for its production growth, its low-cost operations and its enormous dividend potential. If you like income from your stocks, then this one could be perfect for your portfolio!
The Hot Stock - PBF Energy (NYSE: PBF)
2022 was a massive year for PBF Energy (NYSE: PBF). The twelve-month period saw the company’s share price rocket, soaring from just shy of $13 to more than $40 a piece, as the business enjoyed soaring demand.
But what stimulated this share price growth, and why do we think the business is well-positioned to continue providing investors with returns?
Well, first let’s examine the company’s mix of products. PBF Energy’s wide-ranging portfolio includes transportation fuels, heating oil, petrochemical feedstocks and lubricants, insulating the business against negative price fluctuations within any specific product category.
There is also strong demand for these kinds of refined hydrocarbon products.
Then there’s the financial aspect of PBF Energy.
Having raked in the cash during a productive 2022, the business now has zero net debt and cash in excess of $2bn. Additionally, net income for the full year came in at $2.97bn, far above the $315.5m recorded back in 2021. That tallies up to an enormous $22.84 in diluted earnings per share, far higher than the $1.90 recorded the year before.
Soaring revenues outpaced the growth of operational costs, with the company’s modern and high-conversion refineries allowing it to save on expenses in a manner that contemporaries might struggle to compete with.
As you can see, the results have been pretty impressive. But this hasn’t pushed the stock out of reach.
That’s because, even with the stock’s rapid rise, it still trades at a lower price-to-equity ratio than the majority of competitors, suggesting that PBF Energy remains underpriced. As such, the stock could be a good option for investors on the lookout for a bargain in the oil and gas space.
We like PBF Energy for its diversified offering, its strong growth trajectory and the comparative value that its share price offers investors. This stock has been hot for the past 12 months, but we think there’s still time to jump on the bandwagon and embrace PBF Energy.
Buffet’s Pick - Occidental Petroleum Corporation (NYSE: OXY)
Remember, this is Occidental Petroleum Corporation (NYSE: OXY), not “Accidental Petroleum Corporations”. If you, like us, had no idea of the meaning of the word “occidental”, then allow us to enlighten you. The term means ‘of the western world’.
It’s a term that applies to this company in part, as the business was founded way out west in California back in 1920.
The business was acquired by controversial businessman Armand Hammer in the 1950s, with his leadership seeing Occidental expand both domestically and overseas to become one of North America’s most significant players in the oil and gas game.
Armand Hammer is not to be confused with the toothpaste brand Arm & Hammer. However, curiously enough he did acquire a large stake in the toothpaste’s producer, Church & Dwight, during the 1980s. Armand claimed this was a coincidence. A likely story.
But enough about the ballad of Armand Hammer. Why do we like this stock?
Well, let’s start with the financials. While the company’s recent earnings came in below consensus expectations, they nevertheless showed considerable earnings and revenue growth. Record income in 2022 saw the business paying down debt and completing a whopping $3bn share repurchase programme.
What’s more, the business’ massive reserves and diverse portfolio of oil and gas assets around the world offer a solid foundation for further growth.
Next, let’s discuss EOR technology. What is it? Well, EOR stands for Enhanced Oil Recovery and refers to methods that can increase the productivity and lifespan of sites. Occidental is a leading figure in EOR technology, meaning that its operations are often more efficient than those of competitors.
What’s more, the company’s EOR technology ties in with its ESG strategy. That’s because EOR involves injecting CO2 into reservoirs to stimulate the release of oil and gas from porous hydrocarbon-producing rocks.
The company claims this EOR process results in 70% lower net emissions and the business has even set its sights on producing what it calls “net-zero oil” by using the technique along with additional carbon capture measures.
As such, Occidental not only looks like a more environmentally friendly way to invest in hydrocarbons but also a business well prepared for ESG regulations that could be imposed in the coming years.
Finally, it’s worth pointing out that Occidental has some influential fans. Investing powerhouse Warren Buffet is a major backer of the stock and just last week he spent $350m topping up Berkshire Hathaway’s (NYSE: BRK.A) already sizeable interest in the stock.
In summary, we like Occidental for its solid financials, advanced technology and its preparedness for ESG regulation, while the backing of one of the biggest names in money is a bonus.
News in Brief - SVB Saga
Big Tech Casualty. Silicon Valley Bank (NASDAQ: SIVB), the 16th largest bank in the United States, collapsed last week in an event that could cause ripples and ructions across industries. The bank’s President, Greg Becker, is reported to have sold more than $3.6m of stock in the company in the runup to its demise.
Emergency Measures. SIVB’s dramatic downturn has spurred US regulators to cook up new protections for banks and their customers. There’s no bailout for SIVB, but efforts to prevent other financial institutions are reportedly underway, with the Fed said to be easing access to its discount window. Even so, bank stocks are expected to perform poorly across the coming week.
Crypto Concerns. Additionally, Bloomberg has reported that the collapse of SIVB along with the failure of Silvergate Capital (NYSE: SI) could lead to the cost of moving money between fiat and digital currencies leaping by as much as 40%. The publication said this was due to the loss of Silvergate’s exchange network, which allowed for seamless and instantaneous fund transfers.
Security in the UK. The start of this week has seen the operations of Silicon Valley Bank’s UK arm purchased by HSBC, with the £1 rescue deal sparing British tech startups from enormous losses.
Investing Signals
This section uses under-the-radar data to point out some of the stock market’s hottest movers and shakers. As it’s our theme, we’re putting Oil and Gas stocks under the microscope this week.
👷🏻♂️ The top North American oil and gas players by P/E ratio are Vital Energy (NYSE: VTLE), Ring Energy (NYSEAMERICAN: REI), SilverBow Resources (NYSE: SBOW), Callon Petroleum (NYSE: CPE) and PBF Energy (NYSE: PBF). These stocks have the lowest ratios in the industry and could therefore be undervalued by investors, potentially indicating future returns.
👷🏽 Next, we’re looking at the industry’s best operating margins. The top five here are Whitecap Resources (TSX: WCP), Advantage Energy (TSX: AAV), Dorchester Minerals (NASDAQ: DMLP), Crescent Point Energy (NYSE: CPG) and Sitio Royalties (NYSE: STR). These companies’ high operating margins indicate that they are seeing a high amount of profit per dollar of revenue, which could mean strength in the underlying business.
😱 Now we’re going to take a more general look at the stocks generating chatter at the moment. Unsurprisingly, Silicon Valley Bank (NASDAQ: SIVB) is among these trending stocks, sitting as the top search result online over the past week following its dramatic collapse. Its contemporary, Western Alliance (NYSE: WAL) is also trending heavily after tanking by more than 35% last week as fear spreads among financial stocks.
💻 Elsewhere, big trending stocks online include Weight Watchers (NASDAQ: WW), which is elbowing into the prescription drugs space, Walgreens Boots Alliance (NASDAQ: WBA), which is facing an abortion pill controversy, and newly profitable Singaporean outfit Sea Ltd (NYSE: SE).
Fear & Greed
The Fear and Greed Index is a measure of stock market sentiment calculated by CNN Business using seven measures including market momentum, market volatility, and safe haven demand. It’s meant to shed light on the emotions currently driving the market, giving you insight into how traders are making decisions. Remember, traders are humans, not robots.
As you can see below, extreme fear is hitting investors at the start of this week. This is likely due to the ongoing drama surrounding the collapse of Silicon Valley Bank (NASDAQ: SIVB). However, some analysts now expect the US Federal Reserve is likely to avoid a rate hike in March, which could improve investor sentiment in the near term.
More Hot Content from ValueTheMarkets
Earnings Preview: WSM, ADBE, LEN, JBL, ASO
This week’s company earnings include Williams-Sonoma (NYSE: WSM), Adobe Systems Inc (NASDAQ: ADBE), Lennar Corp (NYSE: LEN), Jabil Circuit (NYSE: JBL) and Academy Sports and Outdoors Inc (NASDAQ: ASO).
Three potential IPO listings this week include an e-commerce trading platform, a drinks company, and a gold miner.
Dates in the Diary
Monday 13th – US Consumer Inflation Expectations (Feb)
Tuesday 14th – US Inflation Data (Feb)
Wednesday 15th – UK Spring Budget 2023 / US Mortgage Data (10 Mar) / US Retail Sales Data (Feb) / US PPI (Feb)
Thursday 16th – US Import & Export Data (Feb) / ECB Interest Rate Decision
Friday 17th – Eurozone Final Inflation Data (Feb) / Eurozone Final Wage Growth Data (Feb) / US Manufacturing & Industrial Production Data (Feb)
Fun Fact - First Equity
What was the first-ever stock?
Given the lay of the land today, you’d be forgiven for expecting New York (or at the very least, America) to be the home of this honor. But you’d be wrong. Instead, we must go further afield to solve this particular mystery.
In fact, we’re heading to the city that New York was once named after before the English butted in and got involved. That’s right, we’re headed to Amsterdam.
That's because the first publicly traded stock was the Dutch East India Company, which was traded on the Amsterdam Stock Exchange (now known as EuroNext Amsterdam) from 1602.
In Dutch East India Company stock, residents of the Dutch United Provinces could back a company which imported exotic spices and textiles from the country’s far-flung East Asian colonies to Western Europe.
Profits were strong for decades. After all, the business had a monopoly on sought-after goods like nutmeg, mace, and cloves, and was unafraid about using horrifically unethical practices like slavery, violence and state oppression to its advantage.
However, it couldn’t last forever. Disastrous financial decisions, increasing competition, colonial uprisings and a costly Dutch war with Britain combined to bring the enormous company down in December 1799.
If you ask us, it sounds like they had it coming.
Until Next Time
Many thanks for taking the time to enjoy Investing Intel today, we hope you’ve enjoyed our insights and are looking forward to more in the week ahead.
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Auf Wiedersehen!