Oil and gas stocks have been on the ups since the pandemic crash led to negative prices for some of their products.
These expert analysts look into the future and predict whether investors will continue to benefit from holding these carbon based energy purveyors.
James West is the Senior Managing Director at Evercore ISI responsible for research coverage of the sustainable technologies and clean energy, and oil service, equipment and drilling industries.
James West, Senior Managing Director, Evercore ISI
His 2,733 word interview on the oil and gas industry is an eye opener.
“…We’re starting to see the emergence of a shallow water drilling cycle, particularly in Saudi Arabia, in Abu Dhabi, and then in other areas like the North Sea.
And we are in the early stages of what should be a very significant deepwater cycle. And we’ve seen deepwater rig rates spike. They’ve gone from $150,000 a day at the bottom to probably $450,000 a day on the leading edge today.
And spread costs have gone up as well, as we’re going back into a large drilling cycle for deepwater as the majors, the national companies, and then some of the independents that have deepwater acreage are looking to create base load productive capacity that’s not shale related, that’s not short cycle but longer duration production capacity — as the world comes back into understanding that oil and gas are going to be around for a long period of time and the energy transition that was the big topic du jour of 2020 and particularly 2021 is what’s happening.
And it’s going to take much longer than many expected. So we’re going to need those hydrocarbons…
On the international side, it’s much more activity-driven growth in spending.
And on the deepwater side especially, we’re in the early stages of a deepwater expansion.
And so we’re much more focused on the big, diversified oilfield service companies as investment opportunities, so SLB — Schlumberger, Halliburton, Baker Hughes.
We also like a lot of the deepwater-levered names such as the offshore drillers Transocean (NYSE:RIG), Noble (NYSE:NE), Valaris (NYSE:VAL), and the subsea equipment manufacturers like TechnipFMC (NYSE:FTI), Oceaneering (NYSE:OII), and Dril-Quip (NYSE:DRQ).
And lastly, there are some production-oriented names that we think are very attractive, given their profile of steady and growing cash flows, and ChampionX (NASDAQ:CHX) stands out as a prime candidate there.”
Macro economic factors develop interesting nuance in the oil and gas stock analysis in the 3,178 word interview from the Janus Henderson expert.
Noah Barrett, CFA,Research Analyst, Janus Henderson Investors
Noah Barrett, CFA, is a Research Analyst at Janus Henderson Investors and lead on the firm’s Energy & Utilities Sector Research Team.
“One of the headwinds that we saw in 2022 was the resilience of Russian oil supply.
Market forces worked to ensure that Russian supply could still find a home.
Initially, when the conflict in Ukraine escalated and there was talk of product embargoes, crude embargoes, and self-sanctioning, many thought that a significant amount of Russian oil supply was going to come out of the market.
That ended up not being the case.
Another headwind that we saw in 2022 was crude oil supply coming in from Strategic Petroleum Reserve — SPR — releases, primarily in the U.S. Over the course of the year, the U.S. averaged about 600,000 barrels a day of releases from our SPRs.
That was a lot of oil coming into the market that we didn’t necessarily forecast at the beginning of the year.
A third headwind was weaker than expected Chinese demand, which was actually down year over year in 2022 versus 2021.
At the beginning of the year, there was an expectation around a reopening of China, but a lot of their zero COVID policies stayed in place longer than expected.
Initially we were thinking Chinese demand would grow year over year, but it actually shrank year over year.
As we move into 2023, I think those three headwinds that I just mentioned — Russian supply, SPR releases, and Chinese demand — will be moving from being headwinds to tailwinds for the sector…”
Oil and gas stock expert Mr. Barrett makes some specific recommendations:
“EOG Resources has two new plays that they announced in 2022.
One was the combo play in the Utica and the other was the Dorado gas play in South Texas.
While we do have a good understanding of where hydrocarbons are — not just in the U.S., but globally — there will still be potential discoveries and exploration and capital allocated to developing these new resources.
Globally, I think it’s going to be a little tougher outside of Guyana and, to a lesser extent, Suriname.
Exxon has a big development program in Guyana. Total (NYSE:TTE) and Apache (NASDAQ:APA) are doing some work in Suriname.”
Another oil and gas stock expert has his microcap picks that may provide multiple returns for investors.
Stephane Foucaud, founding partner, Auctus Advisors
Stephane Foucaud is a founding partner at Auctus Advisors where he runs institutional equity research.
He co-founded the U.K. business of FirstEnergy Capital (now part of Stifel Nicolaus Europe) in 2009.
Mr. Foucaud was a managing director for Equity Capital Markets responsible for European institutional research.
His 3,228 word interview has a number of lesser known oil and gas stock picks.
“Diving into an interesting example of the event-driven category, there is a company called Hartshead Resources.
They are listed in Australia.
They operate in the U.K. where they bought gas offshore U.K. licenses that used to be held by ConocoPhillips (NYSE:COP). Those licenses were bought in 2020.
You can imagine that in 2020, a year of COVID and of negative oil prices, there were not many buyers, but they had the courage to acquire these licenses.
With hardly any competition, they bought them for a very low price.
Now fast forward three years, gas prices have gone through the roof. We are close to $20/mcf today for U.K. gas prices, a level unheard of pre-2021.
And those licenses that Hartshead bought for a song now look absolutely great.
Hartshead will do some seismic work and so forth, and is looking for a farm-out partner that will price their asset, fund their development, or even perhaps buy them out.
The real driver of value creation in this case is not so much technology or innovation, it’s a combination of previous knowledge of those assets and their history by the management, and the timing of when they were acquired.
The volatility of the gas prices did the rest.”
Sajjad Alam, CFA, Vice President, Senior Credit Officer, Moody’s Investors Service.
Sajjad Alam, CFA, is a Vice President, Senior Credit Officer in the Corporate Finance Group at Moody’s Investors Service.
As a member of the Oil & Gas Team, he currently covers a portfolio of investment-grade and high-yield E&P, midstream, drilling and oilfield services companies.
His 2,254 word interview advocates a prudent approach to picking the correct oil and gas stocks.
“The industry captures a lot of data and oilfield services companies are very much involved in this, with upstream engineers, and they try to use this data in figuring out how best to select a location to drill.
How to keep the drill bit within a range of where the hydrocarbon sits underneath the surface.
So, more precision drilling, more targeted drilling, helps.
And then, during the fracking process, how best depends on the rock formation and the type of rocks, and the appropriate spacing for fracking.
They use a lot of data in doing their work and drilling the next well and fracking the next well.
If you go back and look at drilling rigs now versus 10 or 20 years ago, clearly today’s rigs are much more automated.
They drill much faster.
There are lots of sensors and monitoring devices that give more control to the drilling engineer. And they can do way more precise work in terms of the well placement.
Some 10 years ago, or even before the last downturn, the industry really focused on becoming efficient in using technology more aggressively.
After the downturn happened in 2015, 2016, there has been a lot of emphasis on automating things.
And those things are happening.
It’s on the margin though and the fundamental techniques are still the same.
You have to find a location, drill a very long well, safely and accurately.”
The best reputation for picking oil and gas stocks for investors is a responsibility for this Truist Securities managing director.
Neal Dingman, Managing Director at Truist Securities, E&P and oilfield services sectors
Neal Dingmann is a Managing Director at Truist Securities covering companies in the E&P and oilfield services sectors.
Mr. Dingmann was recognized by The Wall Street Journal as “Best on the Street” and has been recognized as a “Home Run Hitter” by Institutional Investor magazine.
This oil and gas stock “best” expert explains his current portfolio direction in this 2,239 word interview.
“E&Ps now pay quarterly dividends, variable dividends and buyback shares.
All that provides capital returns in addition to any stock price appreciation.
As a result of the capital returns strategy, free cash flow has become one of the primary metrics analysts like myself analyze in order to decide what companies could reward investors the most going forward.
Today, we estimate FCF — free cash flow — yields between 10% and 30% for my group, which allows a healthy capital return payout for many operators…
One of my favorite small-cap E&Ps is Northern Oil & Gas (NYSE:NOG), which is based in Minneapolis, Minnesota.
The company is unique because they do not operate any of their own wells, rather it has what is called a “non-operated model.”
They find quality operators with attractive assets that can buy partial interests.
If they buy a 10% position of a well or play, they will pay 10% of all operating costs and participate in whatever cash flow the wells generate.
By having a non-operated model, Northern is able to have a more diverse asset base than other companies their size.
Currently, most of their assets are in the Williston basin in North Dakota with the second most assets in the Permian Basin and a small position in the Appalachian Basin.
What we like about Northern is the stock currently trades at a low multiple like most small-cap E&Ps, yet the company participates with many large operators who are able to keep costs lower.”
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