Oil & Gas Sector Review (XOM, CVX, COP, RRC, TSO, PXD, APC, CHK, APA, OXY)

At the end of December, Brent crude spot prices were around $107/barrel and WTI spot prices were around $99/barrel. Since then, Brent has risen to right around $121/barrel today and WTI is up to around $104/barrel. In 2011, pump prices were driven by the price differential between Brent crude and WTI crude, and integrated oil companies that could take advantage of the differential made substantial margins on refining WTI crude and selling the products as if higher priced Brent were the refineries’ feedstock. The differential reached more than $25/barrel at one point, and fell to around $8/barrel early this year. As it widens again, consumers can expect to pay more at the pump and refiners can expect to see margins improve. It goes without saying the higher crude prices also benefit the exploration & production companies.

Natural gas has been stuck at around $2.50/thousand cubic feet for some time now, but have been ticking up recently as production is being slowed — primarily in an effort to pump up prices — while warm winter weather is cutting demand for heating and electricity demand is also falling.

We’ve looked at several oil & gas companies, including the three US-based supermajors and a number of independents with market caps above $10 billion: Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), ConocoPhillips (NYSE: COP), Range Resources Inc. (NYSE: RRC), Tesoro Corp. (NYSE: TSO), Pioneer Natural Resources Co. (NYSE: PXD); Anadarko Petroleum Co. (NYSE: APC), Chesapeake Energy Corp. (NYSE: CHK), Apache Corp. (NYSE: APA), and Occidental Petroleum Corp. (NYSE: OXY). We’ve looked at the past year’s stock price performance, current year performance, and compared that with consensus target prices as reported by Thomson Reuters in an effort to find the stocks we think will be top performers in 2012.

Exxon Mobil Corp. (NYSE: XOM) has a consensus price target of $95, up from $92 at the end of December, and a Friday closing price of $85.62, for a potential upside of about 11.3%. Crude oil price hikes provide substantial benefits to Exxon’s shares, and those price hikes could add $10-$20/barrel to the company’s revenues in the coming year. Exxon is also the largest US natural gas producer, which isn’t helping it much these days. Over the past 12 months, Exxon’s shares have gained just 1.7%

Chevron Corp. (NYSE: CVX) has a consensus price target of $124.50, up $2 since the end of December, and a current price of around $106.66, for a potential upside of about 16.8%. Of the three supermajors, Chevron’s potential gain is the largest, it’s share price gain of nearly 10% in the past year is the largest, and its dividend yield of 3.1% is second only to Conoco’s 3.6% among the three integrated giants. Chevron shares gained nearly 10% in 2011, though they are essentially flat since the beginning of this year.

ConocoPhillips (NYSE: COP) has a consensus price target of $81.32, marginally lower than its December price, and a current price around $73.36, for a potential upside of about 10.8%. Conoco shares have lost nearly -3% of their value in the past year. Since the beginning of the year, the stock has gained about 0.75%.

Range Resources Inc. (NYSE: RRC) has a consensus price target of $73.50, down $3 from its target in December, and a current price around $65.72, for a potential upside of about 12.4%. Year to day Range shares are up about 5.5%, but over the past 12 months the stock gained 34%. And even though it trades at about 56x earnings, Range is often mentioned as a takeover target from one of the supers or another mining company that wants to diversify into energy. Range holds about 800,000 leased acres in the Marcellus shale play, which is located close to the massive northeast US market.

Tesoro Corp. (NYSE: TSO) has a consensus price target of $32, $4 higher than its December price, and a current price of $27.82, for a potential upside of about 14.3%. Tesoro’s share price gained about 7.75% in the past 12 months, but the price is up more than 19% since the beginning of the year. As the Brent/WTI differential widens, Tesoro’s profits will grow. The company has the only refinery in North Dakota, and the differential between Brent and Bakken oil is even more than double the WTI/Brent spread.

Pioneer Natural Resources Co. (NYSE: PXD) has a median price target of $128.50 and a current price around $113.67, for a potential upside of 13%. In the past 12 months, Pioneer’s shares have gained more than 13%, and since the beginning of the year the stock is up more than 27%. Either as a takeover target or as a liquids producer, Pioneer is a solid play. Its forward P/E is a mere 16.6, compared with Range’s monster number.

Anadarko Petroleum Co. (NYSE: APC) has a consensus target price of $100, unchanged since December, and a current price of $88.05, for a potential upside of about 13%. The share price has gained 8.75 % in the past 12 months and the stock is up nearly 16% since the beginning of the year. Until fairly recently, Anadarko’s assets have been exclusively onshore in the US, but its acquisition of Kerr-McGee gave it a position in the Gulf of Mexico and the company has also acquired assets offshore of Africa. Yesterday the company confirmed an initial estimate of 200 million barrels at one of its Gulf of Mexico wells.

Chesapeake Energy Corp. (NYSE: CHK) has a consensus target price of $30, down $5.50 from December’s target, and a current price around $24.71, for a potential upside of 21.4%. Shares have lost more than -19% in the past 12 months, although they’ve risen by more than 11% since the beginning of January. The company is cutting its production of natural gas and selling assets as it tries to get its financial house in order.

Apache Corp. (NYSE: APA) has a consensus price target of $130, down $4 from the December target, and a current price of $109.45, for a potential upside of about 18.3%. The company’s share price fell almost -9% in the past 12 months but shares are up more than 21% so far this year. Investors were cool to the stock yesterday, regardless of the company’s solid earnings report. We have some ideas about why that is happening.

Occidental Petroleum Corp. (NYSE: OXY) has a consensus price target of $118, up $0.50 from December’s target, and a current price around $103.92, for a potential upside of about 13.5%. The company’s share price fell about -2% in the past 12 months but is up about 11% since January. The company raised its dividend by 17% last week, to an annual total of $2.16. Many of Oxy’s assets are located in liquids-rich fields in southern California, where pricing for crude and liquids is higher than anywhere else in the country.

Overall, among these oil & gas stocks, either Range Resources or Pioneer are the best among the independents, primarily on the possibility of a takeover. For sheer power, Apache looks good, regardless of the caution about the company’s capex plan. None of the integrated supermajors has anything to look forward to expect higher prices for their production, and the outlook for refiners has improved as the Brent/WTI spread increases, but that can change in a heartbeat.

Paul Ausick