Just over a year ago, oil futures were trading negatively and the energy sector looked all but wiped out. What a difference a year makes. With West Texas Intermediate crude slipping back below the key $70 a barrel level, the question for investors wanting to own energy stocks is should they step in and buy shares now or wait.
With OPEC settling their issues this past weekend and agreeing on a 400,000 barrel per day production increase, some say now is not the time. However, others, including the energy team at Stifel, are citing the return to pre-pandemic consumption levels, much better discipline from the top exploration and production companies and the fact that the overall market is still very tight.
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In a new research report, Stifel remains optimistic about the energy sector and favors upstream stocks that can return 100% of their enterprise value within 10 years, given the uncertain medium-to-long-term fundamentals for oil and gas. The analysts said this when discussing the sector’s prospects:
Over the last month, we have held meetings and calls with ~40 investors. The investor base was composed of dedicated mutual funds (~25%), generalist (~50%) and dedicated hedge funds (~25%). Throughout this period, investor interest in the Energy sector has faded as commodity prices have weakened and operating/regulatory risks have moderated. While the sector remains attractively priced versus the market and the fundamentals drivers (demand recovery to 2019 levels, E&Ps remaining disciplined, continued sector consolidation, sustained reflation) for continued outperformance remain in place, we expect investors to maintain a neutral stance towards the sector until the global demand outlook for oil further firms (post COVID-19). In our view, a demand recovery to ~100 mmbopd in the second half of 2021 would mitigate oversupply concerns (Iran, U.S., etc.) for 2022.
We screened the upstream stocks the analysts prefer and found five rated Buy that look like solid choices for growth investors with a degree of risk tolerance. While all five are rated Buy, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
APA
This company was long considered an industry leader when it was known as Apache, and the stock is perhaps offering one of the best entry points in the sector. APA Corp. (NYSE: APA) explores for and produces oil and gas properties. It has operations in the United States, Egypt and the United Kingdom, as well as has exploration activities offshore Suriname. It also operates gathering, processing and transmission assets in West Texas, as well as holds ownership in four Permian-to-Gulf Coast pipelines.
The company is one of the largest U.S. exploration and production (E&P) companies with 2.3 billion barrels of oil equivalent of proven reserves (63% liquids). It is an acquirer, exploiter and explorer, a fiscally conservative company that has grown its reserves and production consistently via acquisitions and organic projects.
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