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Let’s Decode the Surge in These 3 Shale Drilling Stocks
Stock Analysis & Ideas

Let’s Decode the Surge in These 3 Shale Drilling Stocks

Story Highlights

Shale drilling activities have been going northwards for a while now. While higher oil and gas prices have certainly helped; there is a key trend at play that is common across the three names on our list that have given about triple-digit gains in the past year, and analysts see further double-digit gains in this stock. 

Crude oil is up nearly 70% in the past year and 46% in 2022 so far. Natural gas prices are hovering in the stratosphere as well. Global uncertainties, demand drivers, and the Russia-Ukraine conflict are some of the factors contributing to this upward trajectory. At the same time, major shale drilling stocks have been on a tear this year.

The trend is in contrast to a time not so long ago when investors were gung-ho about technology companies and growth stocks. Let us take a look at three major names in shale drilling and see what is contributing to their rise.

Occidental Petroleum (OXY)

A number of positives are currently in play for this oil and natural gas provider. Warren Buffett, the Oracle of Omaha, has recently upped his stake in the company to 15.2%. Additionally, Berkshire also owns OXY preferred stock worth about $10 billion and warrants to acquire an additional 83.9 million OXY shares at a $59.62 exercise price per share.

After the COVID-19 impact in 2020, the top line rose to $25.96 billion in 2021 from $17.81 billion in 2020. This figure is further expected to rise to $35 billion in 2022. At the same time, the bottom line has turned around to an earnings per share of $2.55 in 2021 from a net loss per share of $3.91 in 2020. The growth has continued in the recent Q1 with a 55.7% jump in revenue.

Consequently, the share price has followed suit with a nearly 170% gain over the past 12 months.

This outperformance comes from a focus on the company’s 2022 capital plan, record free cash flow generation for the fifth consecutive quarter, and steps to retire $5 billion in debt, while already having retired debt of over $3.6 billion. Subsequently, OXY plans to focus on its $3 billion stock buyback program.

Capital One Financial analyst Richard Tullis has reiterated a Hold rating on the stock while increasing the price target to $85 from $79, implying a potential 28% upside on top of last year’s gains.

Overall, the Street has a Moderate Buy consensus rating on OXY based on 10 Buys, eight Holds, and two Sells. The average price target for the stock is $70.11 at present.

Pioneer Natural (PXD)

Shares of this independent oil and gas explorer and provider have jumped about 94% over the past year. Revenue has jumped to $17.9 billion in 2021 from $7 billion in 2020. In 2022, revenue is expected to be about $25.3 billion. The EPS of the company has also jumped to $13.26 in 2021 from $2.07 in 2020.

Moreover, revenue jumped 152.5% in the first quarter. During the quarter, Pioneer generated $2.3 billion in free cash flow, declared a quarterly dividend of $7.38, and bought back shares worth $250 million, which is 88% of the quarterly cash flow returned to shareholders. Moreover, the dividend payment amounts to an annualized yield of 13%.

The company noted that it is ‘modestly growing production’ in 2022 with a plan to run 22 to 24 drilling rigs.

Raymond James analyst John Freeman has reiterated a Buy rating on the stock alongside a price target of $375, implying a potential upside of nearly 35%.

Overall, the Street has a Moderate Buy consensus rating on Pioneer based on 12 Buys and five Holds. The average price target for Pioneer is $303.82.

Range Resources (RRC)

Range Resources is an independent natural gas, natural gas liquids, and oil company, and its shares have been inching higher over the past 12 months, registering a gain of nearly 143%.

After declining in 2019, revenue surged to $3.58 billion in 2021 from $1.78 billion in 2020. In the same timeframe, EPS has ballooned to $2.02 in 2021 from a net loss per share of $0.09. Analysts expect this figure to more than double to $4.80 in 2022. Earlier this year, the stock was added to the S&P MidCap 400 index.

RRC. too, is focused on efficient capital deployment and enhancing shareholders’ returns. During the most recent Q1, the company pared down debt by $350 million and bought back 600,000 shares. The company has a $500 million share repurchase program in place.

RRC CEO, Jeff Ventura, commented, “Improved commodity pricing and efficient operations drove record-free cash flow and cash flow per share in the first quarter…Range is at the low-end of the global cost curve for natural gas as the most capital efficient operator in the largest natural gas field in the world.”

For 2022, the company plans to hold its production nearly flat at 2.12 to 2.16 billion cubic feet equivalent (BCFE) a day. Furthermore, while production may remain relatively flat, elevated prices are expected to continue for the remainder of the year, which is a boon for the company.

Stifel Nicolaus analyst Michael Scialla has reiterated a Buy rating on the stock with a price target of $49, implying a potential upside of 49.7%. This is on top of the triple-digit gains in the stock in the past year.

Overall, the Street has a Moderate Buy consensus rating on RRC based on six Buys, Six Holds, and a Sell. The stock has an average price target of $39.77.

Closing Note

While all of these names have outperformed the broader indices over the past year, a key trend stands out. These drilling operators are not going after increasing volumes to take advantage of higher prices. On the other hand, they are focusing on maximizing investor returns and the efficient deployment of capital. Given analysts’ price forecasts, further gains may be in the offing.

Read full Disclaimer & Disclosure

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