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Wall Street’s Favorite Oil Stocks For 2022

After souring on the sector for years, Wall Street is increasingly turning positive on energy with a growing number of analysts expressing optimism that the worst could be in the rearview mirror.

Evercore ISI's Stephen Richardson is the latest Wall Street analyst to join the bull camp.

Richardson says the oil rally is supported by a smorgasbord of catalysts, including a waning omicron wave; political unrest in Libya, protests in Kazakhstan, sabotage in Nigeria as well as the threat of war between Russia, a major energy producer, and Ukraine, a major energy transit hub.

Meanwhile, Morgan Stanley oil strategist Martijn Rats has raised Brent oil price forecast to $100 for Q3 2022, following Goldman Sachs' upgrade to $105 earlier in the week.

So why $100? Morgan Stanley thinks $100/b is the level at which oil demand growth begins to slow, noting that in the 2011-2014 time period oil equated to 4.5% of global GDP, at today's GDP and consumption levels, Brent would need to average $110 to achieve the same 'share' of global GDP.

So what oil and gas stocks do these analysts recommend?

Richardson likes Occidental (NYSE: OXY), ConocoPhillips (NYSE: COP) and Devon (NYSE:DVN) while GS likes Occidental, Apache Corp. (NYSE:APA), Antero (NYSE:AR) and Southwestern (NYSE:SWN) but has cut Devon to hold on the back of sharp outperformance and reduced valuation upside. DVN shares are up 162% over the past one year.

Here are our own picks based on these recent recommendations.

#1. ConocoPhillips

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

Last year, 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: last month, 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 14.6% so far this year and are up 91.5% over 52 weeks.

#2. Devon BofA analyst Doug Leggate has an overweight rating on the energy sector and has advised investors to focus on Oil companies with the potential to grow their free cash flows through consolidations or other cost reduction measures, naming Devon Energy (NYSE:DVN), Pioneer Natural Resources (NYSE:PXD), and EOG Resources (NYSE:EOG). 

DVN stock has been one of the best-performing energy stocks thanks to strong earnings and continuing cost discipline, including a variable dividend structure.

Related: When Will The U.S. Tap its Massive Geothermal Energy Potential?

Following the merger with WPX Energy last year, the company announced fixed-plus-variable dividends. Devon has adopted a variable dividend structure—something that has gone down well with Wall Street. The stable portion is indifferent, recently yielding less than 1%. But if the latest convertible payout is a sign of the future, shareholders could receive closer to 7% overall.

Devon paid an $0.11/share regular dividend and a $0.24/share variable dividend during the quarter, implying an annualized 5.5% yield. Further, the company has forecast a dividend yield of more than 7% for 2021 if current trends hold, illustrating its commitment to return more capital to shareholders in the form of dividends whenever cash flows permit.

Some Wall Street analysts have pointed to the potential for DVN to sport a dividend yield of as high as 8% by year-end. After all, this company really is gushing cash, with free cash flow growing eight-fold year over year to $1.1 billion during the third quarter of last year. Nearly half of Devon's price hedging from last year will pay off this year, which could give free cash flow another goose.

However, as Goldman Sachs has noted, DVN has grown quite pricey after the crazy rally, which could limit near-term gains. Devon sports a P/E Ratio (TTM) of 27.6, nearly triple the energy sector's 10.9 reading.

#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 11.9% YTD and 80.9% in 12 months.

By Alex Kimani for Oilprice.com

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Alex Kimani

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