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Oil & Gas Stocks Are Still Good Buys, For a Number of Reasons
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Energy prices remain one of the primary causes of inflation, although the Fed typically focuses on the core bundle that Xs out the volatile oil and food segments. So its 2% target is related to the core bundle that includes vehicles, shelter, transportation and other things.
But of course, the government is doing all it can to bring down energy costs. In fact, President Biden, who has been vocal about the need for clean energy in the past, has in recent months changed course because of the geopolitics-induced shortage. However, despite America being the leading producer of oil, it is hard-pressed to deal with the cost escalation at home, let alone the alleviation of the energy crunch its European allies are seeing.
OPEC+ is only making matters worse by cutting production, to ensure that prices remain high. There are certain politics in play here. Biden can’t endlessly release strategic reserves because, among other things, replenishing will be an uphill task given other constraints, which I’ll come to in a moment. This means that prices will remain stiff, the way OPEC+ intends.
High energy costs increase global inflation, however, because energy prices affect all sectors, and many economies, especially those of the financially weaker nations, could collapse as a result. A global recession is of course not desirable as it will reduce global demand for oil, but that doesn’t seem to be upsetting the OPEC+ camp right now. In the meantime, strategic reserves can’t be depleted any more, which means production increase is the only recourse.
"The oil and gas industry has millions of acres leased. They have 9,000 permits to drill now. They could be drilling right now, yesterday, last week, last year," Biden said earlier this year, while announcing sanctions against Russia. But as everybody very well knows, it doesn’t happen that fast and nor is it that easy.
Oil producing companies are under a lot of pressure. While the surge in demand is encouraging and would have in the past encouraged increased investment on the E&P side, the memory of the 2020 wipeout caused by the pandemic likely remains. Besides, the long-term outlook is bleak given initiatives by governments all over the world to switch to cleaner fuels for heating and transportation.
Even if they were opening up to the need for increased production, they are up against many of the same production constraints that other sectors are seeing. Back in 2020, they had to lay off many of their workers and some of these folks have found alternative employment. So there is a labor shortage. Additionally, they are also seeing supply chain issues, with particular difficulty in acquiring the equipment and sands necessary for fracking.
Baker Hughes data shows that while the rig count has increased for eight straight quarters, the increase of 12 rigs in the last quarter was the smallest since September 2020. It was also followed by a reduction in rigs in the first week of October (by two in oil and one in gas).
And finally, investors are playing a big role. Some have moved to clean energy investments, and those that remain in the “dirty” business have become more income focused. The high prices are generating solid cash flows for these companies and investors want them to return this cash rather than invest in infrastructure that will be redundant in a few years as fossil fuels are replaced with clean energy.
Therefore, energy stocks provide a hedge against inflation, generating capital appreciation as well as earnings through rising dividends. “In 2016, 58% of the oil and gas companies in the Morningstar US Market Index were paying dividends to their shareholders. By the end of 2021, the figure rose to 76%. That’s an increase of 18% and more than any other sector in the market,” shows Morningstar research. Additionally, “Since 2018, the average dividend in dollars per share among exploration and production companies has grown to $40 from $14, an increase of more than 180%.”
This situation is unlikely to change very soon, which makes E&P and integrated producers particularly attractive. Here, I’ve picked a few you might find interesting. EQT has appreciated 96.5% year to date, Exxon Mobil 59.7%, Chesapeake 48.3%, Shell 15.3% and BP 11.4%. For comparison, the S&P 500 shrank -25.3% year to date.
EQT carries a Zacks Rank Rank #1 (Strong Buy). Its Value Score is C but Growth Score is B. Analysts are currently looking for 55.7% revenue growth and 369.6% earnings growth this year. Next year, they’re expecting 51.7% revenue growth and 142.4% earnings growth. Its 2022 earnings estimate is up 33.3% in the last 90 days with the 2023 estimate jumping 55.8% during the same time period. It also pays a dividend that yields 1.4%.
Chesapeake carries a Zacks #1 Rank. It has Value and Growth Scores of A and B, respectively. Its 2022 and 2023 revenues are expected to grow 15.4% and 25.4%, respectively. In 2023, earnings are also expected to grow 34.8%. In the last 90 days, its 2022 estimate has increased consistently for an aggregate 33.1%. For the following year, they’ve increased 67.3%. Its dividend yields 2.3%.
With a Zacks Rank #1 and Value and Growth Scores of B and A respectively, Exxon’s revenue and earnings growth is expected to come in at a respective 54.0% and 144.2% before moderating next year. The estimate revisions trend is great with the 2022 estimate up 14.8% and the 2023 estimate up 9.9%. Its dividend yields 3.59%.
Shell sports a Zacks Rank #1 with Value and Growth Scores at A and B, respectively. Its revenue and earnings are expected to grow a respective 65.2% and 135.0% this year before moderation in 2023. However, the estimate revisions trend indicates that results could come in stronger than these numbers indicate. For 2022, they’re up 7.7% on average. For 2023, they’re up 12.7%. Shell’s dividend yields 3.99%.
The Zacks Rank #2 (Buy) stock has scored A for both Value and Growth. Revenues are expected to grow 46.6% in 2022 and 2.1% in 2023. Its earnings are expected to grow 120.9% in 2022 before declining in 2023. But here too, the revisions trend is encouraging. The 2022 estimate is up 12.8% in the last 90 days. The 2023 estimate is up 14.9%. Its dividend yields 4.77%.
One-Month Price Performance
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Oil & Gas Stocks Are Still Good Buys, For a Number of Reasons
Energy prices remain one of the primary causes of inflation, although the Fed typically focuses on the core bundle that Xs out the volatile oil and food segments. So its 2% target is related to the core bundle that includes vehicles, shelter, transportation and other things.
But of course, the government is doing all it can to bring down energy costs. In fact, President Biden, who has been vocal about the need for clean energy in the past, has in recent months changed course because of the geopolitics-induced shortage. However, despite America being the leading producer of oil, it is hard-pressed to deal with the cost escalation at home, let alone the alleviation of the energy crunch its European allies are seeing.
OPEC+ is only making matters worse by cutting production, to ensure that prices remain high. There are certain politics in play here. Biden can’t endlessly release strategic reserves because, among other things, replenishing will be an uphill task given other constraints, which I’ll come to in a moment. This means that prices will remain stiff, the way OPEC+ intends.
High energy costs increase global inflation, however, because energy prices affect all sectors, and many economies, especially those of the financially weaker nations, could collapse as a result. A global recession is of course not desirable as it will reduce global demand for oil, but that doesn’t seem to be upsetting the OPEC+ camp right now. In the meantime, strategic reserves can’t be depleted any more, which means production increase is the only recourse.
"The oil and gas industry has millions of acres leased. They have 9,000 permits to drill now. They could be drilling right now, yesterday, last week, last year," Biden said earlier this year, while announcing sanctions against Russia. But as everybody very well knows, it doesn’t happen that fast and nor is it that easy.
Oil producing companies are under a lot of pressure. While the surge in demand is encouraging and would have in the past encouraged increased investment on the E&P side, the memory of the 2020 wipeout caused by the pandemic likely remains. Besides, the long-term outlook is bleak given initiatives by governments all over the world to switch to cleaner fuels for heating and transportation.
Even if they were opening up to the need for increased production, they are up against many of the same production constraints that other sectors are seeing. Back in 2020, they had to lay off many of their workers and some of these folks have found alternative employment. So there is a labor shortage. Additionally, they are also seeing supply chain issues, with particular difficulty in acquiring the equipment and sands necessary for fracking.
Baker Hughes data shows that while the rig count has increased for eight straight quarters, the increase of 12 rigs in the last quarter was the smallest since September 2020. It was also followed by a reduction in rigs in the first week of October (by two in oil and one in gas).
And finally, investors are playing a big role. Some have moved to clean energy investments, and those that remain in the “dirty” business have become more income focused. The high prices are generating solid cash flows for these companies and investors want them to return this cash rather than invest in infrastructure that will be redundant in a few years as fossil fuels are replaced with clean energy.
Therefore, energy stocks provide a hedge against inflation, generating capital appreciation as well as earnings through rising dividends. “In 2016, 58% of the oil and gas companies in the Morningstar US Market Index were paying dividends to their shareholders. By the end of 2021, the figure rose to 76%. That’s an increase of 18% and more than any other sector in the market,” shows Morningstar research. Additionally, “Since 2018, the average dividend in dollars per share among exploration and production companies has grown to $40 from $14, an increase of more than 180%.”
This situation is unlikely to change very soon, which makes E&P and integrated producers particularly attractive. Here, I’ve picked a few you might find interesting. EQT has appreciated 96.5% year to date, Exxon Mobil 59.7%, Chesapeake 48.3%, Shell 15.3% and BP 11.4%. For comparison, the S&P 500 shrank -25.3% year to date.
EQT Corporation (EQT - Free Report)
EQT carries a Zacks Rank Rank #1 (Strong Buy). Its Value Score is C but Growth Score is B. Analysts are currently looking for 55.7% revenue growth and 369.6% earnings growth this year. Next year, they’re expecting 51.7% revenue growth and 142.4% earnings growth. Its 2022 earnings estimate is up 33.3% in the last 90 days with the 2023 estimate jumping 55.8% during the same time period. It also pays a dividend that yields 1.4%.
Chesapeake Energy Corporation (CHK - Free Report)
Chesapeake carries a Zacks #1 Rank. It has Value and Growth Scores of A and B, respectively. Its 2022 and 2023 revenues are expected to grow 15.4% and 25.4%, respectively. In 2023, earnings are also expected to grow 34.8%. In the last 90 days, its 2022 estimate has increased consistently for an aggregate 33.1%. For the following year, they’ve increased 67.3%. Its dividend yields 2.3%.
Exxon Mobil Corporation (XOM - Free Report)
With a Zacks Rank #1 and Value and Growth Scores of B and A respectively, Exxon’s revenue and earnings growth is expected to come in at a respective 54.0% and 144.2% before moderating next year. The estimate revisions trend is great with the 2022 estimate up 14.8% and the 2023 estimate up 9.9%. Its dividend yields 3.59%.
Shell plc (SHEL - Free Report)
Shell sports a Zacks Rank #1 with Value and Growth Scores at A and B, respectively. Its revenue and earnings are expected to grow a respective 65.2% and 135.0% this year before moderation in 2023. However, the estimate revisions trend indicates that results could come in stronger than these numbers indicate. For 2022, they’re up 7.7% on average. For 2023, they’re up 12.7%. Shell’s dividend yields 3.99%.
BP plc (BP - Free Report)
The Zacks Rank #2 (Buy) stock has scored A for both Value and Growth. Revenues are expected to grow 46.6% in 2022 and 2.1% in 2023. Its earnings are expected to grow 120.9% in 2022 before declining in 2023. But here too, the revisions trend is encouraging. The 2022 estimate is up 12.8% in the last 90 days. The 2023 estimate is up 14.9%. Its dividend yields 4.77%.
One-Month Price Performance
Image Source: Zacks Investment Research