The oil and gas industry faced plenty of uncertainty last year due to the COVID-19 pandemic. However, this uncertainty seems to be abating as Brent crude hit a high of $80 per barrel yesterday, its highest since November, according to Reuters.
This was after a meeting of the Organization of the Petroleum Exporting Countries (OPEC+), where these countries agreed to stick to increasing their oil production from February. Global trends seemed to indicate that oil demand is unlikely to be impacted by the new variant of the COVID-19, Omicron.
However, according to a Reuters report that quoted analyst Caroline Bain from macro research firm, Capital Economics, as demand gets normalized and OPEC oil production increases, it is expected that oil prices will decline, with Brent crude hitting a low of $60 per barrel by at the end of this year.
Against this background, how will oil exploration companies fare this year? Let us take a look by comparing two oil stocks, Murphy Oil and Hess Corp., using the TipRanks stock comparison tool, and see what Wall Street analysts are saying about these stocks.
Murphy Oil (NYSE: MUR)
Murphy Oil is an oil exploration and production company with onshore and offshore assets in the U.S, Mexico, Gulf of Mexico, Brazil, Australia, and Vietnam. The stock has surged 119.7% in the past year, backed by strong Q3 results that saw the company pay off its long-term debt. The company is expected to announce its Q4 results on January 27.
In Q3, the company achieved its goal of reducing its long-term debt by $300 million in the second half of 2021 by advancing the redemption of $150 million of 6.875 percent senior notes due 2024 that took place on December 2.
Roger W. Jenkins, President, and CEO commented, “Our team continues to successfully execute our major Gulf of Mexico projects as planned, while maintaining consistent onshore production volumes, enabling us to capitalize on rising oil prices and generate excess cash to achieve our goal of reducing long-term debt by $300 million in the second half of this year.”
By the end of Q3, Murphy had reduced its total debt by 17% for 2021.
Moreover, the company also announced that it was reducing its capex guidance for 2021 by $20 million and expects it to be between $675 million and $685 million.
Considering the lowered capex outlook and reduction in debt, J.P. Morgan analyst Arun Jayaram feels that the company’s free cash flow (FCF) will be at an “inflection point” by the middle of this year.
Free cash flow is the cash generated by the company after accounting for cash outflows that support its operations.
The analyst further pointed out that this “inflection point” for its FCF was supported, as the company’s key development project in the Gulf of Mexico at Khaleesi, Mormont, and Samurai is expected to begin initial production of oil by the middle of this year.
From 2021 to 2024, Jayaram expects a capex of $633 million every year for Murphy Oil. It is important here to note that capex is an important measure for capital-intensive industries like oil and gas and helps in gauging the company’s future growth prospects.
But according to the analyst, the fall in capex is not due to lack of growth prospects for the company. Instead, he anticipates capex to fall from $840 million in 2022 as the spending for the development project in the Gulf of Mexico will be an average of only $500 million in 2023-24.
Jayaram has projected that the fall in capex should improve the company’s FCF and estimates $3.6 billion of FCF for MUR from 2022 to 2025. Furthermore, he added, “The strong FCF profile should provide the means to further delever and increase the common stock dividend.”
The analyst upgraded the stock from a Hold to a Buy and raised the price target from $29 to $37 (23.8% upside) on the stock, following the upbeat outlook.
The rest of the analysts, however, are cautiously optimistic about the stock, with a Moderate Buy consensus rating. This rating is based on 3 Buys and 7 Holds. The average Murphy Oil stock prediction of $34.56 implies upside potential of 15.6% to current levels.
When it comes to dividends, the company declared a quarterly cash dividend of $0.125 per share or a dividend of $0.50 per share, on an annualized basis that was payable on December 1 to shareholders of record as of November 15, 2021. This indicates a dividend yield of 1.9% on the stock.
Hess Corp. (NYSE: HES)
Hess, another oil exploration and production company, is expected to announce its Q4 earnings on January 26. Hess was profitable in Q3, with a net income of $115 million versus a loss of $243 million in the same period a year back. Adjusted net income came in at $0.28 per share versus an adjusted net loss of $0.71 per share in the same period a year ago.
When it comes to dividends, the company announced a quarterly dividend of $0.25 per share, payable on December 30, 2021, to shareholders of record as of December 15, 2021. That presents a dividend yield of 1.35% on the stock.
However, net oil production, excluding Libya, fell to 265,000 barrels of oil equivalent per day (boepd) in Q3 from 321,000 boepd in the third quarter of 2020. This was largely due to a fall in production in the Bakken and Gulf of Mexico.
However, the company announced that it expected that the gross discovered recoverable resource on the Stabroek Block, offshore Guyana, will be around 10 billion barrels of oil equivalent (boe) versus its earlier estimate of 9 billion boe.
J.P. Morgan analyst Arun Jayaram is upbeat about the company’s oil production and has modeled an oil Compounded Annual Growth Rate (CAGR) of 14% between 2020 and 2025, “while most other oily E&Ps [exploration and production companies] are running at maintenance mode.”
The analyst expects a majority of this rise in oil production to come primarily from Guyana and expects this asset to “to deliver a sustainable long-term cash flow,” while the company’s three other assets, in Bakken, Gulf of Mexico, and South East Asia, will be “cash flow engines” this year.
Furthermore, Jayaram added that a unique aspect for HES “is the fact that the value of Guyana increases over time as the company develops more phases of the project.” Currently, the analyst has valued the output of Guyana at $56 for every HES share.
As a result, the analyst is optimistic about the stock, with a Buy rating, and has raised the price target from $105 to $108 with a 33.1% upside on the stock.
Other analysts echo Jayaram and are also bullish about the stock, with a Strong Buy consensus rating. This rating is based on 10 Buys and 3 Holds. The average Hess Corp. stock prediction of $107.58 implies upside potential of 32.5% to current levels.
Bottom Line
While analysts are cautiously optimistic about MUR, they are upbeat about HES. Based on the upside potential over the next 12 months, HES certainly seems to be a better Buy.
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Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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