Stock Analysis & Ideas

3 Oil Stocks Likely to Profit from New EPA Rules

Story Highlights

The U.S. EPA is likely to finalize rules that will require oil companies to reduce methane emissions. The new regulation is likely to benefit oil drilling equipment companies. But which companies? Let’s take a look at what we’ve got.

As oil prices soar higher, investors’ focus has turned to oil companies. While oil companies are looking to ramp up oil production, this could also lead to rising methane emissions. Methane is released from oil and gas wells through the flaring or venting of natural gas which contributes to air pollution.

According to the American Association for the Advancement of Science (AAAS), methane levels “in the air are now higher than at any point in human history, driven by emissions from the fossil fuel and agriculture/livestock sectors.” The AAAS is of the view that since methane lasts for less than 10 years in the atmosphere, reducing these emissions “will have a rapid and significant effect on the rate of climate change.”

According to a Wall Street Journal report from May 30, the U.S. Environmental Protection Agency (EPA) has framed new rules to cut methane emissions, but they are yet to be finalized. The report also says that this move could likely benefit oil drilling equipment companies like Baker Hughes, Schlumberger, and Honeywell International.

Using the TipRanks database, we looked at these oil drilling equipment companies in more detail. We will also examine what Wall Street analysts are saying about these stocks.

Baker Hughes (NASDAQ: BKR)

Baker Hughes is an energy technology company that conducts business in around 120 countries. The company’s business segments include Oilfield Services & Equipment (OFSE), Industrial Energy Technology (IET), and the newly created Climate Technology Solutions (CTS) and the Industrial Asset Management (IAM) segments.

Regarding methane emissions, BKR’s CTS business will include Carbon Capture Utilization and Storage (CCUS), emission management, hydrogen, and clean and integrated power solutions. The IAM business is expected to “bring together key digital capabilities, software, and hardware from across the Company to help customers increase efficiencies, improve performance, and reduce emissions for their energy and industrial assets.”

Evercore analyst James West is positive about these clean energy initiatives as BKR “continues to anticipate new energy orders at the upper end of its $100-200M target for 2022.”

The analyst is bullish about the stock with a Buy rating as he believes that BKR has a “clearly defined strategy  to continue to transform the core business, invest for growth which includes leveraging into the industrial space, and positioning for new energy frontiers.”

West also raised the price target to $41 from $34 on the stock, implying an upside potential of 13.9%.

Other analysts on the Street are also upbeat about the stock with a Strong Buy consensus rating based on 13 Buys and one Hold. The average BKR price target is $40.31, which implies a 12% upside potential to current levels.

Schlumberger (NYSE: SLB)

Schlumberger is a technology company that provides digital solutions and deploys “innovative technologies to enable performance and sustainability for the global energy industry.”

In March this year, SLB had announced the launch of a new business, Schlumberger End-to-end Emissions Solutions (SEES), which will offer an extensive set of services and technologies that will enable operators to measure, monitor and report, and ultimately, eliminate “methane and routine flare emissions from their operations.”

The company’s press release stated that methane and flare emissions currently made up more than 60% of direct greenhouse gas (GHG) emissions from the oil and gas industry.

Schlumberger CTO Demos Pafitis commented, “We have created SEES specifically to help our customers deal with one of the most pressing issues of climate change: the urgent need to cut methane emissions. Due to its potency as a GHG and its major share of the industry’s overall operational emissions, tackling methane emissions will make a significant impact.”

Shares of SLB have shot up by 9.8% in the past month after the oil giant posted strong Q1 results with a dividend hike of 40%.

HSBC analyst Abhishek Kumar expects Schlumberger to benefit from higher oil prices as it has led to an uptick in investments in the short cycle U.S. land market. The analyst also anticipates higher margins for SLB and is positive about the dividend hike and “solid” cash flows.

As a result, the analyst upgraded the stock to a Buy from a Hold and raised the price target to $44.20 from $40.60. Kumar’s price target implies a 3.8% downside as the stock has already overshot this valuation.

The stock also scores a Strong Buy from Wall Street analysts with 14 unanimous Buys. The average SLB price target is $50.73, which implies a 10.4% upside potential to current levels.

Honeywell International (NASDAQ: HON)

Honeywell is a Fortune 100 technology company whose solutions include “aerospace products and services; control technologies for buildings and industry; and performance materials globally.”

Honeywell delivered Q1 results which compared favorably with consensus estimates. Even RBC Capital analyst Deanne Dray was impressed with the company’s Q1 results in a tough macroeconomic environment and after the suspension of the company’s Russian operations.

However, the analyst remained concerned about “the supply chain challenges in Aero continue to be a sector-wide pain point, but the business should be well-positioned for a rebound in commercial travel.”

As a result, Dray remained sidelined on the stock with a Hold rating but raised the price target to $215 from $213 on the stock, implying an upside potential of 11%.

However, other analysts on the Street are cautiously optimistic about the stock with a Moderate Buy consensus rating based on five Buys and five Holds. The average HON price target is $217.60, which implies a 12.4% upside potential to current levels.

Bottom Line

It seems that regardless of whether the U.S. EPA finalizes rules to reduce methane gas emissions, these three stocks could still benefit from higher oil prices and solid business fundamentals. If the EPA implements these new rules, these three corporations could only benefit further.

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