The energy sector used to be rather dominant in the weighting of the S&P 500. In 2019, it’s hard to find investors who are all that eager to buy into energy stocks at all. Value investors have started looking long and hard at this sector in 2019, but prices of even the top energy stocks are now reflecting much interest. On top of the notion that these have been underperformers or sleepers at best, many of the top energy stocks have drilled sharp losses into their shareholders. There are even many companies which have gone bankrupt in the sector, and there are too many stocks trading under $1.00 or $2.00 in the sector.
What if all of that negativity surrounding oil and gas is overblown? In the world of Elon Musk or under a “New Green Deal” there might not be a need for very much more oil and gas. In the real world, and certainly in the developing and emerging markets, oil and gas is likely to be prominent for far longer than many environmentalists would care to consider. Is it possible that the energy sector has been laid to waste so deeply that there are finally screaming buys in top oil and gas stocks?
24/7 Wall St. has tracked down seven top oil and gas stocks that are widely recognized as leaders or key players in the energy sector where Wall Street analysts are telling their clients to buy aggressively. These calls are solely that of analysts who follow them, but we have included Refinitiv consensus data and trading history for a comparison. These calls had to be made during or after the sell-off that was seen in the first half of August to be considered in this screen. It also comes at a time after Barron’s had identified about 20 energy companies that should finally be nibbled on by long-term investors.
As a reminder, analysts making new or highly refreshed Buy and Outperform ratings in Dow and S&P 500 stocks are generally calling for upside of 8% to 10% at this stage of the 10-year bull market. When investors see upside of 20%, 25% and much more they need to keep the trading history and recent developments in context. Oil has been in the process of deciding whether this is going to be a new bear market, and that’s troubling times for the companies who live on oil and gas.
BP PLC (NYSE: BP) is the crown jewel of the United Kingdom, and it’s US-listed shares have never recovered back the losses from the Deepwater Horizon spill in April of 2010. BMO Capital Markets resumed coverage of BP with an Outperform rating and its target price was set at $53 for its American depositary shares. BP closed down over 1% at $36.45 on Tuesday ahead of the call, and the consensus target price was $50.26 ahead of the call. On August 13, Goldman Sachs said that BP remains the most interesting turnaround story in big oil and is on the cusp of delivering one of the strongest pipelines of the group. Goldman Sachs’ call was in the U.K. but the 810p target of that time still implies upside of more than 50% at current levels.
Chevron Corp. (NYSE: CVX) was resumed with an Outperform rating and assigned a $165 target price at BMO Capital Markets on August 21. The firm called it one of the lowest risk assets of the major oil and gas stocks. And on August 19, Barclays started Chevron with an Overweight rating and a $145.00 target price based on strong free cash flow expectations. Both analysts preferred Chevron over rival Exxon Mobil Corp. (NYSE: XOM), with a $73 target from Barclays and an $87 target from BMO. Chevron’s shares were trading close to $117.75 on August 21, and the consensus target price of $137.91 was against a 52-week range of $100.22 to $127.60.
Concho Resources Inc. (NYSE: CXO) was hammered at the start of August after earnings, with the shares falling from about $98 down to just under $80. Now its shares have stabilized around $72.00, and two calls stood out after the drop. On August 1, Merrill Lynch maintained its Buy rating and the lower price objective (to $136 from $145) still leaves serious implied upside. Williams Capital had a similar move by maintaining its Buy rating and lowering its target to $155 from $171 in that call. Despite huge implied upside on a $14 billion energy stock, Concho was more recently downgraded to Underweight from Overweight and its target was cut to $64 from $131 by Morgan Stanley. The consensus analyst target price is still up above $126.00, and the shares are now less than half of its 52-week high of $160.81.
Hess Corporation (NYSE: HES) was started with an Overweight rating and assigned a $93.00 price target at Barclays on August 19. Hess was last seen trading at closer to $64.00 and its consensus analyst target was seen at $71.70 on last look. Hess shares are down from a high of $74.81, but its stock chart looks far less destructive compared to other oil and gas stocks. It has a market cap of almost $20 billion, and a stake in Guyana may be worth much more now that it turns out the discovery was exponentially larger than it first expected and may be one of the most valuable finds in recent time.
National Oilwell Varco Inc. (NYSE: NOV) has been hit hard with losses of more than 25% this year alone and its shares are down about 57% from a year ago. The oil and gas equipment making giant is also seen as being in the midst of more layoffs. On August 12, Susquehanna raised its prior Neutral rating to ‘Positive’ and the firm assigned a $25 target price. The stock is down from a 52-week high of $47.46 and it hit a 52-week low in recent days. NOV’s consensus analyst target price is a tad higher at $26.20.
The team at JPMorgan wants its clients to buy the top master limited partnerships (MLPs) now that the sector has been abused. In theory, the group isn’t even supposed to be exposed to most gyrations in energy prices. Reality has proven differently. JPMorgan believes there is substantial upside ahead and Energy Transfer L.P. (NYSE: ET) and Enterprise Products Partners (NYSE: EPD) are the top picks as largest and most diversified of the lot. The price target of $24 for Energy Transfer is versus less than a $14.00 price today, and the units come with a distribution (yield-equivalent) of almost 9%. The target price was$37.00 for Enterprise Products, versus $29.00 recently and it comes with a distribution (yield equivalent) of better than 6% at current prices.
24/7 Wall St. has even gone as far to try to identify the energy sector’s prettiest pigs at the carnival. That explanation should signify just how pessimistic the market is about energy stocks these days. It’s also after the wake of Saudi Aramco’s first financial disclosures ahead of its IPO and as short sellers have been aggressive in oil and gas stocks.
It is important to understand the metrics driving oil and gas, and the current level of close to $56.00 in West Texas crude isn’t exactly going to be a great driver for underlying bullishness in investors looking for bargains in oil and gas stocks. That said, many investors feel comfortable thinking that $50 oil is likely to remain as a good floor based on that only going down to $47 or so during the peak selling at the end of 2018.
One last consideration that cannot be ignored is the broader thematic move into the so-called ESG investment theme covering environmental, social and governance. There are more investment policies at top pensions and other investment firms which now all but prohibit investing into fossil fuels and companies contributing to greenhouse emissions. That means that if a group of stocks sound cheap at a theoretical 10 or 12 times earnings falls down to eight times earnings there might still not be that many new buyers.
To show just how bad things have been, here is how the top performance has been year to date and over the past year for the top three energy sector ETFs:
- VanEck Vectors Oil Services ETF (NYSEARCA: OIH) is down about 17.4% year to date. The ETF is down nearly 52% over the past 52 weeks.
- Energy Select Sector SPDR Fund (NYSEARCA: XLE) is barely positive for the 2019 year thus far, up less than 1%. In the past 52 weeks the ETF is actually down closer to 20%.
- SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP) is down 16.6% year to date, and down 44% in the past year.