Buy These 2 Oil Stocks, Analysts Say, Predicting Strong Gains Ahead

Last week, OPEC announced significant production cuts to be implemented on May 1, totaling approximately 1.16 million barrels of oil per day. This reduction in supply comes at a time when demand is expected to accelerate during the summer travel season, with projections of demand reaching 102 million bpd later this year. As a result, we can expect an anticipated shortfall in supplies, which will likely result in higher prices at the pump and a potential boost to inflation.

For investors, however, there will be opportunities. While the impact of higher oil prices on the broader economy is likely to be negative, the narrower energy sector is looking at a potential windfall of increased earnings. Investors can cash in, too, by finding solid oil stocks with potential for gains in what otherwise promises to be a turbulent summer.

We’ve taken the first step, and used TipRanks, the world’s biggest database of analysts and research, to pull up the details on two oil stocks that are primed for gains under the new conditions of the energy market. Each stock has its own unique history – but right now, the Street’s analysts are predicting strong gains, up to 30% or better, for the coming year. Let’s take closer look.

Northern Oil and Gas (NOG)

We’ll start with Northern Oil and Gas, an exploration and production company working in the North American hydrocarbon sector. Northern operates in three main geographical areas of the continental US: the Williston Basin of Montana and the Dakotas; the Permian Basin of Texas-New Mexico; and the Marcellus formation of western Pennsylvania. The Williston Basin makes up the bulk of Northern’s activities, accounting for approximately 64% of the company’s production.

Northern recently concluded an acquisition that expanded its positions and operations in Texas into the Midland Basin, a subsection of the larger Permian. In January, the company closed on its previously announced deal with MPDC to acquire the Mascot project. The closing gave Northern a 39.958% working interest in the Mascot Project. Northern paid a total of $320 million in cash for the acquisition, which includes $43 million paid up front at the signing.

A quick look at the company’s latest earnings will show the extent of the growth, and the potential. Northern’s Q4 production averaged 78,854 barrels of oil equivalent per day, representing a 23% year-over-year increase. Of that total, 59.5% was oil, and the remainder was a mix of natural gas and natural gas liquids. The company’s revenue for the period was $445.6 million, which exceeded expectations by $37.56 million. However, Northern fell short on the bottom-line, missing the predicted non-GAAP EPS of $1.63 by $0.20. The actual EPS for the period was $1.43.

Northern reported a cash flow from operations of $234.4 million during the quarter, up 48% from the previous year. This figure includes a 23% year-over-year increase in free cash flow, which amounted to $87 million after accounting for changes in net working capital. Additionally, the company increased its revolving credit facility from $1.3 billion to $1.6 billion, further bolstering its overall liquidity.

All of this backed up Northern’s ability to maintain its common share dividend. In its last declaration, Northern set the next dividend payment for April 28, at 34 cents per common share. This represents an increase of 13% from the prior payout, and the annualized rate of $1.36 per common share gives an above-average yield of 4.1%.

Covering this stock for RBC, 5-star analyst Scott Hanold sees plenty of potential for Northern to return value to investors, writing: “NOG’s Permian position should gain significant scale through 2023 and along with its leading edge analytics enhance future growth opportunities. The company has diligently hedged and this should allow further enhancements to its shareholder returns… At strip commodity prices, we estimate a 5-6% annualized dividend yield.”

In line with this outlook, Hanold rates NOG shares an Outperform (i.e. Buy), and his price target, now set at $46, implies a one-year upside potential of 36%. (To watch Hanold’s track record, click here)

The RBC view is hardly the only bullish take on NOG, as the stock has 9 recent analyst reviews on file – all positive, for a unanimous Strong Buy consensus rating. The shares are currently trading for $33.82 and their $47.11 average price target suggests a gain of 39% over the next 12 months. (See NOG stock forecast)

Marathon Oil Corporation (MRO)

Next up is Marathon Oil, an industry leader sporting a $16 billion market cap and more than $7.5 billion in annual revenues. The company is a business descendant of Standard Oil, one of the oldest names in the North American oil industry, and in its current form embodies the hydrocarbon exploration and production (E&P) arm of Marathon Petroleum, from which it spun off in 2011. Currently, Marathon operates in some of the richest oil and gas regions on the continent, including the Bakken of North Dakota and the Eagle Ford and Delaware Basins of Texas.

Marathon operates as an independent E&P firm, and its assets are well balanced, with a nearly 50-50 split between oil and natural gas. The Houston-based company has a record of generating strong profits and is committed to returning capital to shareholders. In addition to its US oil and gas plays, Marathon also operates a ‘well-integrated’ natural gas exploitation play in Equatorial Guinea.

In its last quarterly financial report (4Q22), Marathon reported mixed headline numbers. The company’s revenue was $173 billion, which grew 3.75% year-over-year but missed the forecast by $40 million. On the other hand, the company’s non-GAAP EPS was 88 cents, up 11 cents year-over-year and 3 cents higher than expectations. Although the company’s net cash from operations in Q4 decreased slightly to $1.13 billion from $1.15 billion in the year-ago quarter, it still generated a free cash flow of $794 million for the quarter, underpinning Marathon’s ability to return capital to its shareholders.

On that front, Marathon returned 55% of its FCF to shareholders in 2022 through a combination of share buybacks and dividend payments. The company spent $2.8 billion on buybacks for the full year, and its Q4 dividend payment of 10 cents per share, paid out in March, marked the seventh dividend increase in the last 10 quarters.

This oil major has caught the eye of analyst Derrick Whitfield, of Stifel, who writes, “The company has delivered meaningful value (production growth, portfolio simplification, and free cash flow generation) for its investors since 2018. With an above-average 2023E FCF yield (16% versus a peer average of 12%), the company offers investors one of the most attractive return of capital profiles in the sector. Regarding long-term fundamentals, the company screens as second best on our seven variable quantitative analysis tool.”

“Net net,” the analyst summed up “Marathon’s exceptional asset quality, balance sheet strength, and long-term upside leave us constructive on the stock.”

Looking ahead, Whitfield gives Marathon a Buy rating, with a $37 price target to suggest a 44% upside potential for the coming year. (To watch Whitfield’s track record, click here)

Overall, Marathon’s shares have a Moderate Buy rating from Wall Street’s analysts, based on 15 analyst reviews that include 12 Buys, 1 Hold, and 2 Sells. With a $25.66 current trading price and an average price target of $34.53, Marathon sports an upside potential of ~35% for the next 12 months. (See Marathon stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.