On this date two years ago, West Texas Intermediate (WTI) crude oil traded at right around $40 a barrel, and Brent crude traded at around $41 a barrel. WTI crude traded at $83.40 a barrel Thursday morning, while Brent was at $90.25. Both are down by about a third from their peak levels in early March.
The global breakeven price for crude for 90% of extraction projects was projected to remain below $50 a barrel through 2040, according to a September 2021 report from IHS Markit/S&P Global. Nearly half (44%) break even at $40 or less per barrel.
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Of course, IHS Markit’s analysts did not anticipate the Russian invasion of Ukraine, which sent crude prices soaring, nor did it anticipate soaring inflation, which has dampened demand for crude. According to the U.S. Energy Information Administration’s short-term outlook dated September 7, the average price for a barrel of WTI in 2022 will be $98.07, falling to $90.91 a barrel in 2023. Brent crude will average about $6 a barrel more in both years.
The EIA also forecasts that natural gas will average $15.40 per million BTUs this year and $16.36 in 2023. The Russian cutoff of natural gas supplies to Europe has driven prices there to around three to four times the U.S. price this year. Deliveries of liquefied natural gas (LNG) to Europe have reached record levels, up by 5.8 million tons year over year in August. European stockpiles heading into winter sit at around 86% of capacity, above the five-year average for this time of year.
For oil and gas producers, this cyclical upswing has generated bigger profits and shareholders have been among the primary beneficiaries as the companies raise dividends and increase share buybacks. While volatility in the energy markets is likely to continue, analyst Neil Mehta and his team at Goldman Sachs issued a new report Wednesday naming 10 small-cap and mid-cap oil and gas stocks that are “attractive relative and absolute opportunities” ideas for investors. All 10 are rated Buy.
Antero Resources
Antero Resources Inc. (NYSE: AR) is a supplier of natural gas and natural gas liquids (NGLs) and has at least 15 years of core inventory left in the Appalachian Basin. The key risks to Goldman’s view of the company are falling prices and rising costs chipping away at free cash flow. The firm’s 12-month price target on Antero is $48, and the average target of 15 analysts is $52.13.
The company’s market cap is about $11 billion, and June-quarter sales totaled $2.2 billion. The 52-week range is $15.38 to $48.80, and shares closed Wednesday at $35.83. Total shareholder return over the past 12 months is 118%, even though Antero does not pay a dividend. The buyback yield at the end of the June quarter was 3.3%, and the debt paydown yield was 8.3%.
Calumet Specialty Products
Calumet Specialty Products Partners L.P. (NASDAQ: CLMT) is a master limited partnership (MLP) that manufactures and sells a variety of oil-based and renewable products. Goldman recently upgraded its rating on the stock from Neutral to Buy based on Calumet’s renewable fuels projects and potential for future returns. Goldman’s six-month price target on Antero is $23, and the average target of six analysts is $27.80.
The company’s market cap is about $1.3 billion, and second-quarter sales totaled $1.42 billion. The stock’s 52-week range is $7.33 to $18.47, and shares closed Wednesday at $15.95. Calumet does not pay a dividend, but the one-year share price increase yielded a total shareholder return of nearly 118%.
24/7 Wall St.HF Sinclair
HF Sinclair Corp. (NYSE: DINO) is an independent producer, refiner and marketer of oil and refined products. In Goldman’s view, the company’s refining margins are a major positive in the current macro environment, and Sinclair’s outlook for capital returns to shareholders is solid, especially through share repurchases. Mehta and his team expect $400 million in share buybacks next year and about $350 million in dividends. Goldman’s 12-month price target on Sinclair is $58, and the average target of 16 analysts is $58.79.
Sinclair’s market cap is nearly $11 billion, and second-quarter sales totaled about $11.2 billion. The stock’s 52-week range is $29.14 to $58.50. Shares closed at $50.51 on Wednesday. The company pays an annual dividend of $1.60, and the one-year total shareholder return was 71%.
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Magnolia Oil & Gas
Magnolia Oil & Gas Corp. (NYSE: MGY) has primary operations in the Eagle Ford and Austin Chalk areas of south Texas. It produces 66,000 barrels of oil equivalent in oil, natural gas and NGLs. Goldman believes the company’s low-cost assets could generate low-double-digit free cash flow at a Brent crude price of $90 or more per barrel. Goldman’s 12-month price target on Magnolia is $28, and the average target of 14 analysts is $23.83.
Magnolia’s market cap is $6.2 billion, and June quarter sales totaled $484.7 million. The stock’s 52-week range is $16.02 to $36.33, and shares closed Wednesday at $21.55. The company pays an annual dividend of $0.40 per share, and the total shareholder return over the past 12 months was 36.3%.
PDC Energy
PDC Energy Inc. (NASDAQ: PDCE) is an independent oil and gas exploration and production company operating primarily in the Wattenberg Basin of northeastern Colorado and the Delaware Basin in West Texas. Goldman supports its Buy rating on the company’s ability to obtain new permits in Colorado and ramp production back to previous levels. PDC faces regulatory risk in Colorado, along with production/cost risks. Goldman’s 12-month price target on PDC is $74, and the average target of 13 analysts is $96.83.
The company’s market cap is about $5.9 billion, and second-quarter sales totaled $1.14 billion. The stock’s 52-week range is $43.01 to $89.22, and shares closed on Wednesday at $61.09. PDC pays an annual dividend of $1.40, and the total shareholder return over the past year was 50.5%.
Kosmos Energy
Kosmos Energy Ltd. (NYSE: KOS) is a deep-water oil and gas exploration and production company with operations offshore of Ghana and Equatorial Guinea, as well as in the U.S. Gulf of Mexico. The company is also developing natural gas projects offshore of Mauritania and Senegal. In Goldman’s view, Kosmos offers strong cash flow generation, and the analysts expect free cash flow yield to reach 37% in 2024. Goldman’s six-month price target on the stock is $8.50, and the average 12-month price target of 10 analysts is $9.18.
The company’s market cap is about $2.7 billion, and second-quarter sales totaled nearly $621 million. The stock’s 52-week range is $2.33 to $8.48, and shares closed on Wednesday at $5.87. Kosmos does not pay a dividend, but the rising stock price pushed the total shareholder return over the past year to 154%.
Chesapeake Energy
Chesapeake Energy Corp. (NASDAQ: CHK) is another independent oil and gas exploration and production company. The company’s assets are located primarily in the Marcellus shale of the Appalachian Basin, the Haynesville/Bossier shale of northeastern Louisiana, and the Eagle Ford shale in south Texas. Chesapeake has long been one of the country’s biggest producers of natural gas, and that has been bolstered by its oil-rich Eagle Ford assets.
Goldman sees more than 15 years of drilling inventory in the core natural gas properties and likes the company’s plan to “deploy the bulk” of its free cash flow to shareholders. Goldman’s 12-month price target on the stock is $117, well below the $145.08 per-share average of 14 analysts.
The company’s market cap is about $12.3 billion, and second-quarter sales totaled about $2.8 billion. The stock’s 52-week range is $56.75 to $105.93, and shares closed Wednesday night at $102.08. Chesapeake pays an annual dividend of $6.87 (yield of 6.71%), and the total shareholder return for the past 12 months was 89.8%.
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Delek US
Delek US Holdings Inc. (NYSE: DK) is a refiner and marketer of petroleum and biodiesel products, the owner and operator of product storage and distribution facilities, and the owner and operator of around 240 convenience stores. Goldman likes the company’s refining business, which the analysts say “drives improved capital allocation flexibility” with room for more upside. The company does face a challenge in unlocking its full value due to sum-of-the-parts valuation issues. Goldman’s six-month price target is $34, on par with the average target of $33.77 of 14 analysts.
Delek’s market cap is about $5.9 billion, and second-quarter sales totaled about $5.9 billion. The stock’s 52-week range is $14.07 to $35.23, and shares closed Wednesday night at $26.33. Delek pays an annual dividend of $0.80 (yield of 3.04%). The total shareholder return for the past 12 months was almost 70%.
Ovintiv
Formerly known as Encana, Ovintiv Inc. (NYSE: OVV) is also an independent oil and gas exploration and production company. It holds assets in the Permian and Anadarko basins, the Bakken shales, and the Uinta Basin in eastern Utah, along with several projects in Canada.
Goldman approves of the company’s focused debt reduction and Ovintiv’s plan to direct 50% of free cash flow (not including dividend payments) to shareholders. Inflation, pricing, production and costs must all break right in order to make the dream come true. Goldman’s 12-month price target on the stock is $62, compared to the average target of $56.70 of 24 analysts.
Ovintiv’s market cap is about $12.2 billion, and second-quarter sales totaled about $3.74 billion. The stock’s 52-week range is $28.73 to $63.30, and shares closed Wednesday night at $47.97. The company pays an annual dividend of $1.00 (yield of 2.08%) and the total shareholder return for the past 12 months was 78.7%.
Weatherford
Weatherford International PLC (NASDAQ: WFRD) is an oilfield services company that operates worldwide. According to Goldman’s analysts, Weatherford “carries discovery value” because the equity is based on the same factors as those that apply to large-cap rival Schlumberger, also Buy-rated by Goldman and one of the stocks on the firm’s Conviction List.
The international business, especially from the Middle East, is a strong differentiator for Weatherford as it is for Schlumberger. The risks to that outlook are primarily on the execution side. Goldman’s 12-month price target on the stock is $38, compared to the average target of $45.40 of five analysts.
Weatherford’s market cap is about $2.2 billion, and second-quarter sales totaled about $1.06 billion. The stock’s 52-week range is $16.53 to $40.16, and shares closed Wednesday night at $30.15. The company does not pay a dividend, and the total shareholder return for the past 12 months was nearly 80%. The total return includes a debt paydown of more than 11% but no share buybacks.
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