As news of Russia’s attack on Ukraine rolled in, brent crude oil crossed $100 on Thursday. A CNBC report quoted Matthew Smith, an oil analyst for the Americas at Kepler, as saying that it is highly unlikely that the oil supply would be immediately disrupted following Russia’s attack.
The report also cited Goldman Sachs as saying that its analysts expected “only a modest impact on oil prices, though they see the risks as skewed to the upside because the oil market is already tight.”
Interestingly, a report from StreetInsider.com quoted Goldman Sachs analyst Ben Snider as saying that hedge funds are exiting from the Technology, Communications, and Consumer Discretionary sectors and shifting funds to Energy, Financials, Industrials, and Materials. According to the report, the analyst said in a note to clients, “Hedge funds [are] positioning for a different equity market environment than the one that has characterized most of the last several years.”
Considering this scenario, using the TipRanks stock comparison tool, we looked at the top energy sector stocks. We further shortened this list to two stocks, Chevron and TotalEnergies, about which analysts are bullish and the hedge fund signal regarding these stocks is also positive.
Chevron Corp. (NYSE: CVX)
Chevron Corp. is an integrated chemicals and energy company that engages in the manufacture, development, and transport of crude oil and natural gas. The company’s business segments include Upstream, Downstream, and Chemical Operations.
Chevron is set to hold its Investor Day on March 1. Considering the current environment of strong oil prices, J.P. Morgan analyst Phil Gresh expects that investors could be anticipating “refreshed multi-year financial and capital allocation framework.”
Let us look at whether investors’ expectations could be met by the company and what the analyst thinks about these expectations.
Late last year, Chevron announced a capital and exploratory budget of $15 billion for 2022, an increase of more than 20% from the expected levels in 2021. According to the press release, this program will support “Chevron’s objective of higher returns and lower carbon, including approximately $800 million in lower carbon spending.”
Analyst Gresh expects that this capex outlook is most likely to remain intact. However, the analyst remains curious about whether Chevron would tweak its spending due to the long-term impact of increasing inflation.
Indeed, the company had stated on its Q4 earnings call that it expected production from its assets in the Permian Basin to grow at a compounded annual growth rate (CAGR) of 3% through 2025.
Moreover, for Chevron, earnings are mostly dependent on the profitability of its Upstream business segment, which is highly susceptible to the movement in oil prices. As a result, with rising oil prices, Chevron’s upstream oil business could benefit significantly.
A factor that could be of interest to investors amid a high oil prices scenario, according to Gresh, is that Chevron could have plenty of scope to raise its stock buybacks and reduce its debt.
In 2021, Chevron upped its quarterly dividend per share by 6% to $1.42 and bought back stock worth $1.4 billion. Moreover, the company’s return on capital employed (ROCE) increased to 9.4% and the company reduced its debt by $12.9 billion to $31.4 billion, bringing down its net debt ratio (debt-to-equity ratio) below 20%.
Return on capital employed measures the profitability and efficiency of the company with which its capital is employed. It is calculated by dividing operating profit by capital employed.
Chevron’s ROCE of 9.4% in 2021 was its highest since 2014.
But these financial priorities could not have been achieved without the company’s free cash flow, which stood at a record $21.1 billion at the end of 2021. Free cash flow (FCF) is the cash generated by the company after accounting for cash outflows that support its operations.
Despite all these positive factors, analyst Gresh is sidelined about Chevron with a Hold rating and a price target of $138 (1.8% upside) on the stock.
Other analysts are, however, optimistic about this stock with a Strong Buy consensus rating based on 12 Buys and 4 Holds. The average Chevron stock prediction is $142.08, which implies upside potential of approximately 4.8% to current levels for this stock.
Even hedge funds are positive about the stock, as indicated by the TipRanks Hedge Fund Signal tool. In the last quarter, hedge funds increased their holdings of Chevron by 9.7 million shares, showing their enthusiasm for the stock.
TotalEnergies SA (NYSE: TTE)
TotalEnergies is an integrated oil and gas company whose business is centered around the following business segments: Exploration & Production; Integrated Gas, Renewables & Power; Downstream (Refining & Chemicals and Marketing & Services).
Earlier this month, the company announced its Fiscal Q4 results, and considering the higher oil prices and rising demand, TotalEnergies delivered an adjusted net income of $6.8 billion, 5.2 times the same period last year. The company’s cash flow came in at $9.8 billion, up 98% year-over-year.
For 2022, TotalEnergies anticipates that higher demand and low oil inventories in the short term could result in higher oil prices this year, depending on the oil production from the Organization of the Petroleum Exporting Countries (OPEC+) countries and higher “unconventional” oil production in the U.S.
Moreover, the company thinks that gas prices could be on the uptick, as the futures markets anticipates gas prices to remain above $20 per million British thermal units (mbtu) in 2022.
Additionally, the company has projected its production of hydrocarbons to grow by around 2% “driven by the start-ups of Mero 1 in Brazil and Ikike in Nigeria.”
In 2022, TotalEnergies has planned net investments ranging between $14 billion and $15 billion, of which 50% will be allocated to the company’s growth and the remaining to maintaining its activity base. The company intends to allocate $3.5 billion, or 25% of its net investments, to its renewables and electricity business.
What’s more, TotalEnergies intends to allocate a portion of the surplus cash flow from rising hydrocarbon prices to stock buybacks. As a result, the oil and gas company intends to buy back shares worth $2 billion in the first half of this year and increase interim dividends by 5% this year.
Earlier this month, the company’s Board of Directors also approved a final dividend of €0.66 per share for FY21.
Considering this upbeat outlook for Total this year, MKM Partners analyst John Gerdes reiterated a Buy rating and raised the price target from $76 to $81 (43.9% upside) on the stock. The analyst also updated his financial model for the stock, looking at the above factors, and expects that this business model could generate a composite equity return of 9% for the stock.
Other analysts are also bullish about this stock, with a Strong Buy consensus rating based on 3 Buys. The average TotalEnergies stock prediction was $76.49, which implies upside potential of approximately 35.9% to current levels for this stock.
Even hedge funds are positive about the stock as indicated by the TipRanks Hedge Fund Signal tool. In the last quarter, hedge funds increased their holdings of TTE by 985,900 shares, showing their enthusiasm for the stock.
Bottom Line
While analysts and hedge funds are bullish about both stocks, based on the upside potential over the next 12 months, TotalEnergies seems to be a better Buy.
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