tiprankstipranks
Are Oil Stocks Worth Drilling into Right Now?
Stock Analysis & Ideas

Are Oil Stocks Worth Drilling into Right Now?

The geopolitical conflict between Russia and Ukraine has led countries in the Group of Seven (G7) to ban the import of Russian crude while the European Union (EU) is mulling the same. This has led to oil prices soaring and crossing the $100 mark, but oil production is not following the same upward trajectory.

According to a Wall Street Journal report from last week, nine of the largest oil producers in the U.S. have doled out a total of $9.4 billion to shareholders through dividends and stock repurchases, more than 50% higher (54% to be exact) than these companies have been investing in developments.

According to the report, the reasons for the limited oil production range from controlled capex, supply chain logjams, and harsh winter weather.

The report quoted Arun Jayaram, an analyst at J.P. Morgan Chase as saying, “Historically, this industry has reacted to the commodity price. Now, they’re sitting on their hands.”

In this scenario, should investors pursue oil stocks for their dividend yield or stay away from them as oil production is reduced in some cases and stable in others? We drilled through the TipRanks stocks screener and explored three oil stocks that Wall Street analysts are bullish on, and could offer investors significant upside from current levels.

ConocoPhillips (NYSE: COP)

ConocoPhillips is an oil exploration and production company, headquartered in Houston, Texas. The company has operations in 13 countries and total assets worth $93 billion. The oil giant delivered strong Q1 results with adjusted earnings of $3.27 per share versus $0.69 per share in the same period last year.

Ryan Lance, Chairman and CEO of ConocoPhillips commented, “We also increased our targeted 2022 returns to shareholders by an additional 25%, to a new total of $10 billion, as we continue to execute on all elements of our Triple Mandate.”

Lance added its earnings call that COP has “a five-plus year track record of returning well over 30% of our CFO [cash flow from operations] to our shareholders.”

In the first quarter, COP paid $0.9 billion in ordinary dividends and variable return of cash (VROC) payments while it repurchased shares worth $1.4 billion.

According to Mizuho Securities analyst Vincent Lovaglio, COP’s anticipated payout in 2022 implies a dividend yield of 7.3%, which is “a premium to some larger cap US E&P [exploration and production] plays with greater short-cycle exposure.”

The top-rated analyst believes that this premium is “warranted” due to COP’s lower leverage at 0.5x net debt to cash flow, sustained lower capital requirements, and “relatively greater investment in longer-cycle which adds visibility on longer-term resource development and production, all of which contribute to greater confidence in (1) through cycle cash returns and (2) relatively greater regular dividend payout.”

COP generated $7 billion in cash from operations and successfully reduced its total debt by $1.2 billion. The company is aiming to reduce its debt by around $5 billion.

When it comes to oil production, COP averaged 1,747 thousand barrels of oil equivalent per day, (MBOED) in Q1, a “record level of production” for the company since it became an independent oil producer around ten years back.

However, for FY22, the company has reduced its oil production target from 1.8 million BOED earlier to around 1.76 million. This is to reflect the “net impact of closed A&D [acquisitions and dispositions] activity through this point in the year, as well as some expected impacts from weather and well timing.”

Inflation was the running theme for COP, too, resulting in a higher capex guidance for FY22 from $7.2 billion earlier to $7.8 billion.

Analyst Lovaglio wonders whether the trend of larger non-operational spend by several E&P companies in the U.S. is “more a function of increasing activity or relatively greater exposure to service and supply tightness.”

Nonetheless, the analyst is bullish about the stock with a Buy rating and a price target of $150 on the stock, implying an upside potential of 32.4% at current levels.

The rest of the analysts on the Street also side with Lovaglio, resulting in a Strong Buy consensus rating based on 12 Buys and two Holds. The average COP stock forecast is $128.69, implying a 32.4% upside potential to current levels.

Pioneer Natural (NYSE: PXD)

Pioneer is an independent oil exploration and production company headquartered in Irving, Texas that “explores for, develops and produces oil, NGLs [natural gas liquids] and gas in the Midland Basin in West Texas.”

In Q1, PXD generated strong free cash flows (FCF) of $2.3 billion, with around 90% of these cash flows being returned to shareholders.

Pioneer’s CEO, Scott D. Sheffield commented on the results, “Consistent with our robust investment framework, underpinned by our low reinvestment rate and industry-leading return of free cash flow, the Board declared a second quarter base-plus-variable dividend of $7.38 per share, equating to an annualized yield of 13%, which is the highest yield in the S&P 500, combined with repurchasing $250 million of stock during the first quarter.”

The company generated a net income of $2 billion in Q1, with earnings of $7.85 per diluted share.

Shares of PXD have been on an upward trajectory this year with the stock jumping 30.7% year-to-date.

Interestingly, Scott Sheffield, commented on the earnings call that Pioneer’s “capital return framework is resilient through cycle, resulting in significant dividend payouts over a wide range of commodity prices, even when including the impact of cash taxes.”

Elaborating further, Sheffield pointed out that if oil prices remained at an average of $60 for the rest of the year, PXD’s shareholders would receive around $17 in dividends per share while at $120, they would receive $31.

The CEO added that PXD’s shareholders “have significant upside on higher oil prices as we have 0 [zero] 2022 oil hedges.”

When it comes to oil production, PXD expects oil production to average between 342 and 357 MBOEPD while total production is projected to average in the range of 623 to 648 MBOEPD. This oil production forecast at midpoint was below Siebert Williams Shank analyst Gabriele Sorbara’s estimate of 354 MBOEPD and 2.5% below the consensus estimates.

Considering the “strong capital returns and reaffirmed 2022 outlook,” Sorbara is optimistic about the stock with a Buy rating and views PXD as a “unique  Midland  Basin  pure‐play  with  a  clear  capital  returns framework  that  should  command  a wide  premium  valuation  to its  peer group.”

The analyst has a price target of $372 on the stock, nearer to the Street high price target of $400, which implies a significant upside potential of 52.2% at current levels.

Other analysts on Wall Street are also upbeat about the stock with a Strong Buy consensus rating based on 15 Buys and five Holds. The average PXD stock forecast is $294.75, implying 20.6% upside potential to current levels.

Schlumberger (NYSE: SLB)

Schlumberger is a large offshore drilling services company. SLB also delivered a strong Q1 with revenues up 14% year-over-year to $6 billion. Earnings came in at $0.36 per share, an increase of 71% year-over-year.

What’s more, the company’s Board approved a 40% hike in cash dividend to $0.175 per share. Evercore ISI analyst James West views this hike as a “clear indication that visibility into achieving its margin targets are improving.”

With rising demand for oil, soaring commodity prices and geopolitical uncertainty regarding Russia’s invasion of Ukraine, Schlumberger stated in its earnings press release that “We believe the current market dynamics should allow us to maintain our full-year ambitions of year-on-year revenue growth in the mid-teens.”

Considering these factors, SLB remains West’s top pick and he considers the company as “extremely well positioned for the unfolding upcycle due to its heavy international and offshore exposure, capital disciplined approach, leading digital businesses and leveraging the benefits of size, scale and scope.”

The analyst reiterated a Buy rating and a price target of $51 on the stock, implying an upside potential of 34.1% at current levels.

Other analysts on Wall Street are also optimistic about the stock with a Strong Buy consensus rating based on a unanimous 14 Buys. The average SLB stock forecast is $50.73, implying 33.4% upside potential to current levels.

Bottom Line

It is evident from the above list that while oil companies are pulling back on production due to inflationary concerns or supply chain constraints, the above three firms continue to return significant capital to their shareholders in the form of dividends or stock buybacks.

If and when inflation eases up, and supply chain logjams cease to exist, there is a possibility that oil production will also increase, resulting in these companies benefitting from higher oil prices.

Discover new investment ideas with data you can trust.

Read full Disclaimer & Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles