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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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3 North American Stocks To Capitalize On Higher Oil Prices

  • The current year has been an annus mirabilis for energy investors thanks to high energy prices
  • Investment banks are generally optimistic about crude oil prices in 2022
  • North American oil and gas stocks are well-positioned to profit from higher energy prices next year.

The energy sector is increasingly looking to end the year on a high note after U.S. crude oil managed to overcome an early slump to close above $75/bbl in Monday's trading session. Indeed, oil prices are now trading at their highest level in a month, with Brent crude trading near $80 as Omicron fears continue easing. A new study conducted by South African scientists suggests that Omicron could displace the Delta variant of coronavirus because infection with the new variant boosts immunity to the older one. So far, people who contract Omicron are presenting with milder symptoms than those who get infected with Delta and are also less likely to be hospitalized.

Oil stocks are flying again, with the sector's favorite benchmark, the Energy Select Sector SPDR ETF (NYSEARCA:XLE), climbing 2.2% to lead the Santa Claus rally.

APA Corp. (NYSE:APA) topped Monday's S&P leaderboard after climbing 7.3% on the day, with Devon Corp.(NYSE:DVN), Diamondback Energy, Inc. (NASDAQ:FANG), EOG Resources (NYSE:EOG), Marathon Oil Corporation (NYSE:MRO), Pioneer Natural Resources Company (NYSE:PXD), ConocoPhillips (NYSE:COP) and Occidental Petroleum Corporation (NYSE:OXY) all making strong gains.

With the year drawing to a close, it's time for investors to recalibrate their portfolios. The current year has been an annus mirabilis for energy investors thanks to high energy prices. But the oil markets continue to be volatile and turbulent thanks to the pandemic and the ongoing energy transition.

Luckily, Wall Street remains largely bullish on the energy sector, with some analysts predicting even higher oil prices in 2022.

Barclays has predicted that the WTI contract price will increase from the current rate of $73 to an average price of $77 in 2022, noting that the Biden administration's sale of oil from the Strategic Petroleum Reserve isn't a sustainable way to bring down prices. Barclays says prices could go even higher than that forecast if COVID-19 outbreaks are minimized and thus allow demand to grow more than expected. 

Goldman Sachs shares that bullish outlook and has predicted a Brent price of $85 per barrel by 2023 compared to the current $76.30.

Here are our top 3 North American oil stocks for 2022.

#1. ConocoPhillips

ConocoPhillips (NYSE:COP) is a top shale player that primarily engages in conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations.

Last quarter, Bank of America upgraded COP shares to Buy from Neutral with a $67 price target, calling the company a "cash machine" with the potential for accelerated returns.

According to BofA analyst Doug Leggate, Conoco looks "poised to accelerate cash returns at an earlier and more significant pace than any 'pure-play' E&P or oil major." 

Leggate COP shares have pulled back to more attractive levels "but with a different macro outlook from when [Brent] oil peaked close to $70."

But best of all, the BofA analyst believes COP is highly exposed to a longer-term oil recovery.

But BofA is not the only Wall Street punter that's gushing about COP.

In a note to clients, Raymond James says the company's stock price is undervaluing the flood of cash the oil and gas company is poised to generate.

Well, it appears the analysts were right on the money: three weeks ago, Conoco unveiled its preliminary plans for 2022, highlighting a three-tiered program that could see the company return around $7 billion in cash to investors in 2022.

COP provides a re-engineered shareholder return plan with:

 1) Base dividend of $2.4B (2.5% of market cap) 

2) Variable dividend of 20c/s in the coming quarter (1.1% of current market cap, annualized)

3) Share buyback of $3.5B (3.7% of market cap)

If sustained, this positions COP shareholders for a 7.3% payout with little production growth. COP is penciling in a 36% increase in capex for the year (22% adjusting for the Permian purchase) but a mere 3% production growth. In effect, Conoco is set to return around $7 billion in cash to investors over the coming year. 

The company is also making smart investments, including its $9.5 billion all-cash acquisition of Royal Dutch Shell's (NYSE:RDS.A) Permian Basin assets and also investing about $200 million in green projects to reduce its carbon emissions. 

COP shares have returned 83.1% YTD.

#2. Cenovus Energy 

Canadian Oil Sands oil company Cenovus Energy (NYSE:CVE) develops, produces, and markets crude oil, natural gas liquids, and natural gas in Canada, the United States and the Asia Pacific region. The company operates through Oil Sands, Conventional, and Refining and Marketing segments.

Long-suffering Canadian energy stocks are beginning to look like real bargains.

CVE shares have shot to a 52-week high after J.P. Morgan upgraded the shares to Overweight from Neutral with a C$14.50 price target (45% potential upside), citing progress on execution of last year's takeover of Husky Energy (OTCPK:HUSKF).

Cenovus shares remain undervalued, yet the company is in a great position to generate enough free cash flow to buy back its ConocoPhillips' stake.

Last week, Cenovus released 2022e guidance and a 5-year outlook. The company said that at $75 WTI price, it would be able to generate "excess free cash flow" of $33B over the next 5yrs, or around 100% of the company's current market cap.

More immediately, Cenovus plans to generate $5.5B of excess free cash flow in 2022 (16% of the company's current market cap) and will allocate 50%+ to shareholders through buybacks and dividends.

Cenovus management is currently authorized to repurchase ~146M shares or ~7% of shares outstanding.

Over the 5-year forecast horizon, CVE plans to maintain 800kb/d of upstream production (up 4% vs 2021, but flat from 2022e onwards).

Perhaps most importantly, and opposite the Company's 2019 capital markets mishaps, Cenovus plans to reduce capital expenditures over the forecast period (while sustaining production and increasing shareholder returns).

CVE shares have gained 106.6% YTD.

#3. APA Corp.

Shares of APA Corp. (NYSE:APA) have been surging after the company signed an agreement with the Egyptian government to invest at least $3.5B on research, development, and production in the country's Western Desert.

According to APA's management, the deal consolidates 90% of gross production into a single concession and also refreshes existing development lease terms for 20 years.

Just last month, Egypt's parliament approved an agreement to modernize and consolidate its production sharing contracts with the government.

APA's joint venture with China's Sinopec is projected to increase gross capital investment by $235M in Egypt during 2022 and boost Egypt's gross oil production by 13-15%. The company says the joint venture will be entitled to recover nearly $900M of backlogged costs over five years starting from April 1, 2021.

Last year, APA announced a major oil discovery at its 1.4-million-acre offshore Suriname tract adjacent to Exxon Mobil Corp.'s (NYSE: XOM) historic discovery. APA said it has made a world-class discovery at the Kwaskwasi-1 well located in the prolific Guyana-Suriname Basin, where it encountered 278 meters (912 feet) of net oil and volatile oil / gas condensate pay.

Bank of America Merrill Lynch touted the Suriname prospect as a potential game-changer for APA:

"Suriname has the potential to reset the investment case," Merrill Lynch's veteran oil-industry analyst Doug Leggate said.

APA shares have gained 97.1% YTD.

By Alex Kimani for Oilprice.com

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