Oil-and-gas stocks are just coming off one of their most tumultuous years in history. In 2020, the oil and gas sector was hit with a triple-whammy of a senseless price war between two of the largest producers; unprecedented destruction in energy demand and the inexorable march of the clean energy and ESG megatrends. Those factors worked in tandem to condemn the sector to another annus horribilis where it, yet again, emerged as the worst-performing of the U.S.’ 11 market sectors. But the oil and gas sector is once again proving that it might be down but most definitely not out.
The energy sector has lately staged a very impressive rebound, outperforming the S&P 500 after gaining 34% in the space of three months with a large chunk of those gains, ironically, coming after Joe Biden was declared president-elect.
The rally is largely being fueled by growing hopes that we can finally vanquish Covid-19 and return to normal life thanks to the availability of multiple vaccines as well as continuing production discipline by OPEC+.
Opinion on the future of the industry remains divided. On the one hand, the bears and shorts contend that the sector is little more than a value trap that is doomed to come crashing down again as renewables gain the ascendancy. On the opposite side of the spectrum, the bulls and longs counter by pointing out that it might be decades before renewables and EVs can fully challenge the oil and gas hegemony.
The current oil rally certainly is an encouraging indicator, though not necessarily a be-all harbinger. Still, it’s the bulls and the dumpster divers that appear to have the upper hand here.
In its Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) has predicted that Brent prices will average $49/b in 2021, up from an average of $43/b in the fourth quarter of 2020. EIA has forecast Brent prices will average $47/b in the first quarter of 2021 and gradually rise to an average of $50/b by the fourth quarter as more people get vaccinated and the economy reopens.
Related: Goldman Sachs: Here's What's Behind Saudi's Shocking Production Cut Decision
But even EIA might be too conservative, and one Forbes analyst sees Brent averaging $55 in the current year, which would provide a 15% uptick for the entire sector.
If you belong to the bull camp, here are three key ways to play the oil and gas rebound in 2021.
Source: CNN Money
#1 Undervalued companies with improving fundamentals Oil and gas companies with improving fundamentals, especially those that have pared down their debts or successfully restructured appear to be returning to investors’ good books.
One such company is Antero Resources Corp (NYSE:AR). AR shares are up 134% over the past 12 months and 15% in the first two trading sessions of the new year. Colorado-based Antero Resources 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.
Related: The Beginning Of A New Megatrend In Solar Energy
The company has been plagued by worries regarding its ballooning debt, which has now reached $6.2B, giving the company a debt-to-equity ratio of 0.95. However, the shares have enjoyed a powerful run after the company managed to clinch an overriding royalty interest transaction with Sixth Street Partners that will pump an additional $402M to its coffers. The deal will allow AR to pay down debt while also retaining the long-term upside of its core acreage position.
About a month ago, JPMorgan upgraded AR to Overweight from Underweight with a $6 price target saying the company is uniquely positioned to take advantage of anticipated declines in U.S. supply for natural gas liquids and robust international demand for liquefied petroleum gases.
JPM also tapped Chevron Corp. (NYSE:CVX), ConocoPhillips (NYSE:COP), Devon Energy Corp. (NYSE:DVN), Diamond Energy Inc. (NASDAQ:FNG), Hess Corp.(NYSE:HES), Cimarex Energy Co. (NYSE:XEC), and Valero Energy Corp. (NYSE:VLO) as being well-positioned to outperform following a decade of lagging the rest of the market.
#2 iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
This is an exchange-traded fund that invests in oil and gas companies specifically focused on exploration and production. ConocoPhillips (NYSE:COP), EOG Resources (NYSE:EOG), Marathon Petroleum (NYSE:MPC), Valero Energy Corporation (NYSE:VAL) and Phillips66 (NYSE:PSX) are among its 10 largest holdings.
IEO has significantly outperformed its bigger brethren, XOP, over the past three-year and one-year timeframes and also outperformed it during the last big oil rally of 2016-2018. The fund has surged 46% over the past 3 months and 7.3% YTD.
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#3 Energy Select Sector SPDR Fund (XLE)
A rising tide lifts all boats, and no boat is bigger than the Energy Select Sector SPDR Fund (XLE).
The XLE is the U.S. energy market closest proxy, with holdings that include virtually all the sector’s heavyweights: ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), Phillips 66, Schlumberger (NYSE:SLB) etc.
As big oil stocks go, so goes the XLE, with the fund up 36% over 90 days and 6.7% YTD.
By Alex Kimani for Oilprice.com
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