Crude oil prices have eased past $120/bbl to their highest levels in three months after Saudi Arabia raised the official selling price of its Arab light crude to Asia. Energy traders remain largely bullish that supplies will remain tight and continue supporting high oil prices given short-term supply outlooks.
Citing tighter market balances, several analysts have raised their oil price targets, with Citi saying that they expect Russian production and exports to fall by 1M-1.5 M bbl/day by year-end 2022.
Not surprisingly, several oil stocks are trading at all-time highs, namely ConocoPhillips (NYSE:COP), EOG Resources (NYSE:EOG), Marathon Petroleum Corp. (NYSE:MPC), Valero Energy Corp. (NYSE:VLO), Civitas Resources (NYSE:CIVI), Whiting Petroleum Corp. (NYSE:WLL), Oasis Petroleum (NASDAQ:OAS) and Matador Resources (NYSE:MTDR).
But a cross-section of analysts is now warning that the oil price rally could be in danger of collapsing.
“Energy traders are confident this oil market will remain tight given the short-term supply outlooks from both OPEC+ and the US, but it has been a steady climb higher. Exhaustion could be settling in,” Ed Moya, senior market analyst at Oanda, has told Bloomberg.
Indeed, there’s a case to be made that the energy sector could be overheating.
So far this year through June 7th, only one S&P 500 sector can claim significant gains--energy-- and it’s up a lot: the sector’s favorite benchmark, the Energy Select Sector SPDR Fund (NYSEARCA:XLE) has gained 56.3%. Utilities are the only other sector in the green, but the sector’s 2% YTD gain is nothing really to write home about. In contrast, the S&P 500 is going through an annus horribilis, having lost 14.8% YTD.
Another metric also suggests that oil prices (and stocks) could be close to overbought territory.
The long-term average Gold-Oil ratio has been that one ounce of gold would buy 16.53 barrels of oil. Any time an ounce of gold would buy more than 16.53 barrels of oil meant that either oil was cheap or gold was expensive. Conversely, oil has been regarded as being expensive or gold cheap whenever an ounce of gold would buy less than 16.53 barrels.
Morgan Stanley's Martijn Rats and Amy Sergeant have said that although the oil-gold ratio has historically been a poor indicator of future oil prices, it can still be of interest to investors seeking guidance on the direction of oil prices. Knowing this can help investors determine whether they should be buying more oil and selling their gold, or vice-versa. The current Gold-Oil ratio of 15.61 suggests that the current WTI price of $118.30/barrel is slightly on the higher side, and needs to fall to ~$117.71/barrel.
Yet another metric suggests that oil and gas stocks are getting pricey.
Prof. Robert Shiller of Yale University invented the Shiller P/E to measure the market's valuation. The Shiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. While valuations are a poor short-term timing tool, they are a great predictor of long-term stock prices. The Shiller P/E ratio reliably predicted stock performance over 10 years.
The energy sector currently has a Shiller P/E of 37.20, with only Real Estate (47.10), Consumer Cyclical(43.90), and Technology (39.10) being more expensive.
For comparison purposes, the S&P 500 has a Shiller P/E of 32.10 but its regular P/E ratio of 20.8 is slightly higher than energy’s 20.7.
That said, there are still some great bargains in the oil and gas sector. Here are five.
Market Cap: $14.9B
P/E Ratio (Fwd): 5.52
YTD Returns: 68.2%
Ovintiv Inc.(NYSE:OVV) is a Denver, Colorado-based energy company that, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids.
The company’s principal assets include Permian in west Texas and Anadarko in west-central Oklahoma; and Montney in northeast British Columbia and northwest Alberta. Its other upstream assets comprise Bakken in North Dakota, and Uinta in central Utah; and Horn River in northeast British Columbia, and Wheatland in southern Alberta.
Last month, Mizuho upgraded OVV to $78 from $54 (good for 32% upside to current price), citing improving tailwinds.
- Civitas Resources
Market Cap: $6.8B
P/E Ratio (Fwd): 5.73
YTD Returns: 64.6%
Another Denver, Colorado E&P company, Civitas Resources, Inc. (NYSE:CIVI) focuses on the acquisition, development, and production of oil and natural gas in the Rocky Mountain region, primarily in the Wattenberg Field of the Denver-Julesburg Basin of Colorado.
As of December 31, 2021, it had proved reserves 397.7 MMBoe comprising 143.6 MMbbls of crude oil, 106.0 MMbbls of natural gas liquids, and 888.5 Bcf of natural gas.
Benjamin Halliburton, chief investment officer at Building Benjamins, has recommended buying Civitas saying that the company’s strong balance sheet and increasing free cash flow could propel the shares to $110 next year(31.7% upside), and its annual dividend payout could hit $6 up from $1.63 currently.
Market Cap: $3.9B
P/E Ratio (Fwd): 6.26
YTD Returns: 53.4%
Enerplus Corporation (NYSE:ERF)(TSX:ERF), together with subsidiaries, engages in the exploration and development of crude oil and natural gas in the United States and Canada. The company’s oil and natural gas properties are located primarily in North Dakota, Colorado, and Pennsylvania; and Alberta, British Columbia, and Saskatchewan.
As of December 31, 2021, the company had proved plus probable gross reserves of approximately 8.2 million barrels (MMbbls) of light and medium crude oil; 20.7 MMbbls of heavy crude oil; 299.3 MMbbls of tight oil; 56.2 MMbbls of natural gas liquids; 19.7 billion cubic feet (Bcf) of conventional natural gas; and 1,367.9 Bcf of shale gas.
Jason Bouvier, an analyst at Scotiabank, told the Financial Post has picked Enerplus as one of Canada’s energy companies with the lowest capex breakevens (including hedging gains).
- Occidental Petroleum
Market Cap: $65.9B
P/E Ratio (Fwd): 6.76
YTD Returns: 124.1%
Headquartered in Houston, Texas, Occidental Petroleum Corporation (NYSE:OXY) together with its subsidiaries, engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, Africa, and Latin America. The company also owns a Chemical segment that manufactures and markets basic chemicals, including chlorine, caustic soda, chlorinated organics, potassium chemicals, ethylene dichloride, chlorinated isocyanurates, sodium silicates, and calcium chloride; vinyls comprising vinyl chloride monomer, polyvinyl chloride, and ethylene.
Last month, Ecopetrol (NYSE:EC) announced an agreement to develop four deepwater blocks off the coast of Colombia with Occidental Petroleum. Ecopetrol revealed that it will take a 40% stake in the blocks while Occidental subsidiary Anadarko Colombia will have a 60% stake and will serve as operator.
- Canadian Natural Resources
Market Cap: $78.1B
P/E Ratio (Fwd): 7.19
YTD Returns: 55.3%
Canadian Natural Resources Limited (NYSE:CNQ) acquires, explores for, develops, produces, markets, and sells crude oil, natural gas, and natural gas liquids (NGLs).
As of December 31, 2020, the company had total proved crude oil, bitumen, and NGLs reserves of 10,528 million barrels (MMbbl); total proved plus probable crude oil, bitumen, and NGLs reserves were 13,271 MMbbl; proved SCO reserves were 6,998 MMbbl; total proved plus probable SCO reserves were 7,535 MMbbl; proved natural gas reserves were 12,168 billion cubic feet (Bcf), and total proved plus probable natural gas reserves were 20,249 Bcf.
Last month, CNQ announced solid Q1 earnings and cash flow, paired with previously announced dividend and buyback plans. As with most peers, a good Q1 print is likely to be followed by even better Q2 results.
By Alex Kimani for Oilprice.com
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