U.S. crude oil futures slipped below $72/bbl on Friday but managed to close with a fourth straight weekly gain thanks in large part to the slow recovery in production following two hurricanes in the U.S. Gulf of Mexico.
Oil markets have, however, kicked off the new week on a losing note, with WTI trading at $70.40/bbl after pulling back from a seven-week high of $72.86/bbl that it hit on Wednesday. Natural gas prices have also pulled back from a seven-year high of $5.460/MMBtu, also set on Wednesday, to trade at $4.99/MMBtu as demand concerns have resurfaced following China reporting a new Covid-19 outbreak in Fujian province while Japan has extended stricter Covid-19 lockdown measures.
IHS Markit's Marshall Steeves says oil prices could face near-term weakness as Gulf output recovers; however, he says oil prices in the longer term will mainly be dictated by demand growth.
That said, the stock market bull run shows no signs of slowing down. According to Michael Hartnett, BofA chief investment strategist, the market is seeing a "monster reallocation of cash-to-stocks as tax redistribution threat recedes & Fed expected to remain Wall St-friendly (liquidity easiest since Jul' 07)."
Last week saw the largest inflow into U.S. large-cap funds ever at $28.3B, more than 4x the inflows of $6.9B for U.S. growth funds, $4.2B for small-cap funds and $1.6B for value stocks. Among large-caps, the Technology Select Sector SPDR ETF (NYSEARCA:XLK) attracted the largest inflows at $3.2B while the Energy Select Sector SPDR ETF (NYSEARCA:XLE) saw the fourth highest inflows at $1B.
Here are five oil and gas stocks that have provided the best returns so far this year (excluding dividends).
#1. Antero Resources Corporation
Market Cap: $5.24B
YTD Share Returns: 206.6% Colorado-based Antero Resources (NYSE:AR) is the 3rd largest U.S. natural gas producer, pumping 3.2 bcf/d of natural gas from the Appalachian Basin, where it owns 612,000 net acres of oil and gas properties sitting on 18,893 billion cubic feet (535 billion cubic meters) of estimated proved reserves.
The company has been plagued by worries regarding its ballooning long-term debt, which hit $5.4B by the end of September. Luckily, the company has been able to pay down much of the debt, which currently stands at $2.4B.
Despite the impressive run this year, AR shares carry a Strong Buy rating on Wall Street with an average price target of $18.32.
#2. Range Resources Corporation
Market Cap: $4.53B
YTD Share Returns: 182.8%
Operating in the gas-rich Marcellus Formation in Texas, Range Resources (NYSE:RRC) is the 8th largest U.S. shale gas producer. As of December 31, 2020, the company owned and operated 1,310 net producing wells and approximately 781,000 net acres under lease located in the Appalachian region of the northeastern United States. The company's acreage is superior to that of most of its peers, which allows it to enjoy a lower decline rate and more efficient operations.
Recently, Morgan Stanley picked Range Resources together with its shale gas peer Antero Resources as their favorite gas stocks because their outsized exposure to liquids still makes sense with the growing prospects of a propane supply squeeze. Propane's trading at 75% of WTI, significantly above the more typical low 50s percentage for this time of year, with the Wall Street bank remaining bullish on LPG prices.
#3. Continental Resources, Inc.
Market Cap: $15.17B
YTD Share Returns: 157.5%
Oklahoma-based Continental Resources (NYSE:CLR), the company controlled by billionaire Harold Hamm, produces crude oil and natural gas primarily in the north, south, and east regions of the United States. The company sells its crude oil and natural gas production to energy marketing companies, crude oil refining companies, and natural gas gathering and processing companies. As of December 31, 2020, its proved reserves were 1,104 million barrels of crude oil equivalent (MMBoe) with proved developed reserves of 627 MMBoe.
Last year during the energy crisis, Continental Resources ceased all its shale operations in North Dakota and shut in most wells in its Bakken oil field totaling roughly 200,000 bpd. Luckily, the company has been able to bounce back and has projected $2.4 billion in free cash flow in 2021 at current strip prices. The company has also boosted its quarterly dividend to $0.15 per share and resumed its share repurchase program. Management has said it expects leverage to be below 1.0x by the end of the year.
#4. Magnolia Oil & Gas Corporation
Market Cap: $3.94B
YTD Share Returns: 136.7%
Magnolia Oil & Gas Corporation (NYSE:MGY) is a Houston, Texas-based company that engages in the acquisition, development, exploration, and production of oil, natural gas, and natural gas liquids reserves in the United States. The company's properties are located primarily in Karnes County and the Giddings Field in South Texas principally comprising the Eagle Ford Shale and the Austin Chalk formation. As of December 31, 2020, its assets consisted of a total leasehold position of 460,398 net acres.
Back in August, analysts at Truist upgraded MGY from Hold to Buy with a $21 price target (26% upside to current price), saying the company is likely to continue seeing continued outperformance and upside from the company's Giddings area, thus driving dividend growth and share buybacks.
Further, Magnolia has always maintained a philosophy of low debt and positive free cash flow, which has served the company well during the crisis.
#5. PDC Energy, Inc.
Market Cap: $4.35B
YTD Share Returns: 114.6%
One of J.P. Morgan's fall "playbook" for oil and gas exploration and production companies are those with the highest potential return of "significant" levels of free cash flow to equity holders--rather than merely using it for reducing debt, as most oil and gas companies have done this year. Indeed, JPM says that since the end of 2020, companies in the firm's coverage group have cut net debt by $9.65 billion through balance sheets of June 30.
PDC Energy (NASDAQ:PDCE) is one such company that has announced cash return strategies beyond normal dividends.
PDC Energy is an independent exploration and production company that produces crude oil, natural gas, and natural gas liquids in the United States. The company's operations are primarily located in the Wattenberg Field in Colorado and the Delaware Basin in Texas. As of December 31, 2020, it owned interests in approximately 3,727 productive gross wells.
JPM also favors PDCE as a top pick because:
"We think that the current price environment remains a 'sweet spot,' with demand gradually recovering from COVID-19 and the OPEC/shale market share war remaining fairly subdued largely driven by public company shale discipline."
By Alex Kimani for Oilprice.com
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