‘Load Up,’ Says Barclays About These 3 Energy Stocks

While the political and social pressures in the energy sector all point toward renewable power sources, a new note from Barclays indicates that the real action lies in the oil sector, with exploration and production (E&P) as a particular bright spot.

The firm’s thesis is supported by an underlying fact: that oil and natural gas will remain our key energy resources. However, it rests mostly on some key features of the oil companies. Covering the energy sector, the firm’s analyst, Betty Jiang, notes that oil companies have recent histories of strong free cash flow generation, which has supported solid capital returns. Additionally, these companies are now anticipating rising commodity prices in the near term, with oil already climbing back towards $100 per barrel.

Summing up the outlook for conventional energy, Jiang writes, “We believe the [Integrated Oil & E&P] sector offers a better value proposition than ever before. Across our coverage universe, we see strong balance sheets, low cash flow breakeven prices, and significant free cash flow generation with the group on pace to return ~20% of their market cap on average through dividends and buybacks over the next three years (at strip pricing)… We prefer companies that have: 1) a high rate of growth for cash flow per debt-adjusted share, 2) significant cash return to shareholders, 3) under-levered balance sheets, and 4) a differentiated asset portfolio that adds optionality in a higher commodity price environment.”

Against this backdrop, Jiang has opened positive coverage on several energy stocks, believing now is the time to be loading up on 3 particular names. Does the rest of the Street agree with the Barclays view? This we can find out with some help from the TipRanks database. Let’s check the details .

ExxonMobil (XOM)

The first stock on our Barclays-backed list is ExxonMobil, one of the oil industry’s global giants. ExxonMobil is the largest of the US-based international oil companies, and the second-largest on the global scene when measured by market cap – its ~$478 billion value puts it behind only Saudi Aramco. When ranked by revenues, ExxonMobil places fourth among global oil firms, reporting a top line revenue of $334.7 billion in 2023.

ExxonMobil has reached this pinnacle through a combination of sound asset acquisition and solid execution. The company’s main business is in hydrocarbons – the discovery, extraction, transport, and delivery of resources in both crude oil and natural gas. In addition, ExxonMobil is a leader in the petrochemical and industrial chemical industries, and has its hands in the plastics industry, where it is working to develop lines of lighter-weight, environmentally safer plastics technologies.

In recent months, ExxonMobil has made some important announcements regarding its expansion. Three notable announcements were made last November. First, was the completion of the company’s $4.9 billion acquisition of Denbury, a production company focused on carbon-based unconventional petroleum extraction from previously exploited oil fields and operating mainly in the Rocky Mountains and the Gulf Coast. Next was the commencement of oil production in the third ExxonMobil project off the Guyana coast. Finally, in a move towards less traditional energy sources, ExxonMobil publicly announced on November 13th that it had commenced active drilling operations at its lithium well site in Arkansas. Arkansas has extensive lithium deposits, and ExxonMobil has deep experience in drilling for resources; this project aims at commercial lithium production in 2027, and will make ExxonMobil a player in the market for high-end rechargeable batteries used in both electronic devices and electric vehicles.

Turning to the financial side, we find that ExxonMobil reported $84.34 billion at the top line in its 4Q23 report, the last released. That figure was down 11.6% year-over-year, and came in $4.48 billion below the forecast. While revenues disappointed, earnings were better; the company’s 4Q bottom line, of $2.48 per share in non-GAAP measures, beat the expectations by 27 cents per share.

The company generated solid cash flows for Q4 and the full-year 2023. Quarterly free cash flow came to $8 billion, while for the full year the FCF reached $36.1 billion. The company’s ability to generate cash supported the dividend; shareholder distributions came to $32.4 billion in 2023. ExxonMobil’s most recent dividend, 95 cents per common share for 1Q24, annualizes to $3.80 per share and yields 3.09%.

Barclays’ Betty Jiang sees multiple reasons for buying into XOM, and sums them up concisely: “We believe XOM could be in the early innings of a super earnings cycle powered by a higher than normal pricing and margin environment, strategic growth assets in the upstream, and major capital investments in downstream/chemicals. We see three key drivers that should differentiate XOM from peers in the coming years: material growth in cost-advantaged upstream production, margin expansion from full value chain integration and a more streamlined organization, and a growing low-carbon business that can deliver returns and reduce emissions… We believe the market is under-appreciating XOM’s earnings power with estimates materially below company guidance.”

Looking to the year ahead, Jiang rates XOM as Overweight (i.e. Buy) with a $147 price target to imply a 20% upside in the next 12 months. (To watch Jiang’s track record, click here.)

Overall, XOM gets a Moderate Buy consensus rating from the Street’s analysts, based on 17 recent reviews that include 11 Buys and 6 Holds. That said, the $125.31 average price target suggests the shares will remain rangebound for the time being. (See XOM stock forecast)

Chevron Corporation (CVX)

Next up, Chevron, is another of the world’s largest oil companies, a perennial part of the ‘top ten’ leaders in the industry. By market cap, Chevron’s $299.5 billion ranks it third, behind ExxonMobil, while the company ranks eighth when counted by revenue, of which it brought in $196.91 billion last year.

Like ExxonMobil above, Chevron has achieved this industry-leading scale through solid performance in its core business activities, which revolve primarily around the exploration and production of oil and natural gas assets. Chevron also has large-scale activities in the refining of crude oil; the transport of oil, gas, and refined hydrocarbon products; and even in the operation and management of a maritime shipping line for various fossil fuel products. The common denominator here is moving energy resources into the global economy.

Chevron doesn’t stop with exploring, producing, and moving hydrocarbon fuels. The company also has a long history in the production and distribution of fuels, lubricants, and additives, which it distributes through retailers and through a wide-ranging network of branded gas stations – most of us have, at some time, gassed up our car at a Chevron station. The company’s refined fuel business is a part of its larger petrochemical business.

Chevron’s recent important business moves include its activity in Kazakhstan, where it holds a 50% interest in the supergiant Tengiz oil field, located to the northeast of the Caspian Sea. Chevron’s stake is in TCO, the company formed specifically to exploit this oil field and tap into its reserves, which are estimated to include as much as 25.5 billion barrels of recoverable crude oil. The company is also engaged in the acquisition of Hess Corporation, a $60 billion transaction that promises to greatly expand Chevron’s production assets. The acquisition was expected to close during 1H24 but is delayed – the delay is said to be caused by continued legal wrangling, as various parties with drilling rights in Guyana, including ExxonMobil, are pursuing international arbitration.

Also like ExxonMobil, Chevron reported a miss on revenue and a beat on earnings in its last quarterly report, which covered 4Q23. The top line in the quarter came to $47.18 billion, for a 16.5% y/y drop and sliding in $6.02 billion under the forecast. The company’s bottom line, reported as a $3.45 non-GAAP EPS, was better, coming in 23 cents per share above the forecast.

Of note to return-minded investors, Chevron’s last dividend payment, sent out on March 11, represented an 8% increase from the previous quarter. The payment, of $1.63 per share for 1Q23, annualizes to $6.52 per share and has a forward yield of 4%.

This is another oil major that Barclays’ Jiang sees as a solid buy. In her comments on the stock, she says, “After a period of challenging mega-project developments over the last decade, CVX is finally shifting into a development that’s lower capital intensity, lower execution risk, and more flexible short-cycle production. We believe CVX offers outsized cash return (second highest in our coverage universe), free cash flow inflection from start-up of the TCO expansion, and a high return legacy position in the Permian.”

Quantifying her stance on CVX, Jiang rates the shares as Overweight (i.e. Buy), and she complements that with a $203 price target indicating potential for a 25% gain in the next 12 months.

Chevron’s Moderate Buy consensus rating is based on 14 recent reviews, with a breakdown of 9 Buys to 5 Holds. The shares have a current trading price of $162.67 and an average target price of $176.54, together implying an 8.5% one-year upside potential. (See CVX stock forecast)

Coterra Energy (CTRA)

Last on our list is Coterra Energy, one of the independent players in the US energy economy. Based in Houston, Texas, Coterra works in the exploration and production of oil and gas assets, operating in its home state’s Permian Basin, one of the world’s leading hydrocarbon production regions, as well as in the Anadarko Basin of neighboring Oklahoma and in the Marcellus Shale of the Appalachian Mountains. Coterra’s assets are extensive in both oil and natural gas and form a highly diversified portfolio.

In 4Q23, Coterra’s assets brought in a total of $1.56 billion at the top line; while this was down almost 30% year-over-year, it was $80 million above expectations. The company’s bottom line was reported as 52 cents per share, a non-GAAP figure that was 2 pennies below the pre-release forecast.

Along with its earnings, Coterra also announced an increase in its dividend, bumping the payment up to 21 cents per share, up 5% compared to the prior payout. The annualized rate of 84 cents yields 2.97%. The company’s total shareholder returns came to 77% of the free cash flow in Q4, the last reported, much higher than the company’s public commitment to returning 50% of the FCF to shareholders. In Q4, Coterra had a total FCF of $413 million.

Looking once again at the Barclays view, Betty Jiang says of Coterra, “We believe three factors differentiate CTRA within the E&P space: 1) a high quality asset portfolio with scale and decade plus runway across each of its three core assets—Permian Delaware, Marcellus, and Anadarko; 2) diversification of geography and commodities, enabling more resilient cash flow and shareholder return through the cycles; and 3) a rigorous and nimble capital allocation process that takes advantage of the commodity cycles to capture outsized returns. This diversification advantage has been evident this year as CTRA reallocated capital from the Marcellus to the liquids plays owing to record-low gas prices and will likely do the reverse when gas prices recover, all while generating ~$1.3+bn per year of FCF at $75 oil and $2.50 gas.”

These factors add up to a solid choice for investors, and Jiang goes on to further outline Coterra’s advantages: “Combined with a low cost structure, continued operational outperformance and a near net-cash balance sheet, we estimate CTRA will generate an attractive and growing organic FCF yield—from 7.1% in 2024 to 12+% in 2026 at strip prices. The company has committed to return >50% of the FCF to shareholders via dividend and buybacks, which on our numbers translates into a cash return of 22% over the next 3 years.”

Taken together, these comments support the analyst’s Overweight (i.e. Buy) rating, while her $36 price target suggests a 28% one-year gain is in the offing. (To watch Jiang’s track record, click here.)

All in all, Coterra has a Strong Buy consensus rating, based on 17 reviews that split 15 to 2 in favor of Buy over Hold. The shares are trading for $28.18 and the $32.41 average price target indicates room for 15% share appreciation this year. (See CTRA stock forecast)

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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.