The energy sector emerged as the best performer amongst 11 U.S. market sectors, delivering handsome returns at a time when everybody else faltered. Indeed, energy was the only sector to finish in the green last year thanks to the global energy crisis pushing commodity prices to multi-decade highs and the Fed hiking interest rates a record seven times. Meanwhile, the sector’s popular benchmark, the Energy Select Sector SPDR Fund (NYSE: ARCA), gained 47.5% during the year.
Despite the huge runup, energy investors are expected to enjoy another annus mirabilis. After all, energy stocks remain relatively cheap, undervalued, and come with above-average projected earnings growth; energy companies have been rewarding shareholders with abundant dividends and share buybacks while companies in the space have adopted more discipline in their spending.
At the same time, the lifting of strict Covid-19 restrictions in China is likely to significantly increase oil demand, as hedge fund trader Pierre Andurand has told Bloomberg.
It’s a view shared by Energy Aspects founder and director of research Amrita Sen, "Right now, COVID is rampant but once they come out of it, demand is going to be huge," she has said of China.
Here are three large oil stocks that shone in 2022 and are likely to repeat the feat in 2023.
- Occidental Petroleum
Market Cap: $55.3B
12-Month Returns: 96.6%
PE (Fwd): 6.15
Occidental Petroleum Corporation (NYSE: OXY) and its subsidiaries engage in the acquisition, exploration, and development of oil and gas properties in the United States and internationally–and the company has had an amazing year–especially when you consider that just a short while ago it looked like it was headed for bankruptcy.
Instead, OXY shares have become one of Warren Buffett’s favorite energy picks. According to Berkshire Hathaway's (NYSE: BRK.B) latest 13F filing, Warren Buffet bought Occidental Petroleum shares in a price range between $55 to $62 during the third quarters. Although OXY has declined from its recent highs in the low 70s (current share price of $61.05), it can easily revisit those highs given its historically high volatility.
Occidental has continued to expand production from its high-quality asset holdings and continues to benefit from the acquisition of Anadarko. To this end, Occidental Petroleum has been increasing capex helped by an expanding bottom line. Meanwhile, Occidental’s current ROCE (Return On Capital Employed) of 23.23% is much higher than the industry average of 14.1%.
Oxy’s revenues for the first three quarters of 2022 were stunning, wowing investors with a 57% increase to over $28.4 billion, while earnings per share had gained 19 cents. While there will be some detractors, the general consensus is that OXY will continue to shine in 2023 due to a lot of lessons learned and some new prudence.
- Hess Corporation
Market Cap: $41.3B
12-Month Returns: 75.2%
PE (Fwd): 18.7
New York-based Hess Corporation (NYSE: HES), explores, develops, produces and sells crude oil, natural gas and natural gas liquids (NGLs).
Whereas Exxon Mobil (NYSE: HES) is the operator of the prolific Stabroek block in offshore Guyana where it holds a 45% interest, Hess Corp. is a key partner with a 30% stake while China’s Cnooc (OTCPK: CEOHF) holds a 25% interest. Back in June, the partners announced that they had made yet more discoveries in the block, with reserves now estimated to be at least 11 billion BOE, up from the previous estimate of more than 10 billion BOE. The updated resource estimate includes three new discoveries on the block at Barreleye, Lukanani, and Patwa in addition to the Fangtooth and Lau Lau discoveries announced a few months prior. Hess’ management made a presentation in November and guided for production to triple in Guyana by fiscal year 2027 when they expect to have 6 FPSOs producing oil. Last year, Hess also made more discoveries in Suriname.
- Marathon Petroleum Corporation
Market Cap: $52.0B
12-Month Returns: 68.9%
PE (Fwd): 4.4
Marathon Petroleum Corporation (NYSE: MPC), together with its subsidiaries, operates as an integrated downstream energy company primarily in the United States. Marathon is the United States’ largest refining system, with approximately 2.9 million barrels per calendar day of crude oil refining capacity across 13 refineries.
MPC looks like a good long-term holding thanks to low debt, good coverage of obligations, handsome margins, well-covered dividends, and a solid outlook. The company's refining system has been running at near-full utilization due to high fuel demand. Over the past few years, MPC has managed to repurchase ~30% of its outstanding shares, giving a nice boost to the bottom-line. Indeed, the company’s adjusted EBITDA for Refining & Marketing segment jumped to $5.5 billion during last year’s third quarter as compared to $1.2 billion during the previous year’s corresponding period, thanks in large part to high margins and volumes.
By Alex Kimani for Oilprice.com
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