With the year drawing to a close, it's time for investors to recalibrate their portfolios. The current year has been an annus mirabilis for energy investors thanks to high energy prices. But the oil markets continue to be volatile and turbulent thanks to the pandemic and the ongoing energy transition.
Oil prices have come under pressure, again, with WTI sinking to $67/bbl on Monday as Omicron threat continues to loom over winter holidays in Europe and the U.S. Rapidly increasing cases of the new variant have stoked investor worries that new mobility restrictions to combat its spread could hit fuel demand, as the Netherlands enters lockdown to battle its spread.
A government that's growing increasingly hostile to the oil and gas sector is not helping matters either.
Last week, in a major policy shift designed to fight climate change and accelerate the use of renewable energy, the Biden administration ordered an immediate end to federal support for new coal, oil and gas projects overseas.
ConocoPhillips (NYSE:COP) CEO Ryan Lance has, however, warned that government pressure on energy producers to halt investments in new oil, gas, and coal production and new questions about OPEC's spare production capacity are, "setting up for a messy transition" and could lead to energy price volatility.
"To have an orderly transition, oil and gas are part of the solution, not the problem," Hess (NYSE:HES) CEO John Hess has said.
However, whereas the U.S. government will withhold support, it will not actively seek to prevent U.S. companies from building fossil fuel projects overseas, and oil and gas will continue to be the world's primary energy source for years, if not decades.
Here are our top oil and gas picks for 2022.
#1. ExxonMobil
Texas-based Exxon Mobil Corporation (NYSE:XOM) is America's largest integrated energy company. As of December 31, 2020, Exxon boasted approximately 22,239 net operated wells with proved reserves.
A few days ago, Bank of America picked 11 stocks for each of the 11 market sectors, noting:
"These stocks are mostly neglected by active funds and benefit more from inflation, higher GDP, higher interest rates, higher oil prices and wage growth than an equal-weighted 11 sector portfolio, all of which we expect will occur in 2022," strategist Savita Subramanian and team wrote in a note.
Subramanian tapped Exxon Mobil as her top energy pick, saying Exxon has a higher oil beta than Chevron (NYSE:CVX), 10% FCF yield, and a high ESG score.
#2. 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 quarter, 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.
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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.
#3. Cenovus Energy Inc.
Canadian Oil Sands oil company Cenovus Energy (NYSE:CVE) develops, produces, and markets crude oil, natural gas liquids, and natural gas in Canada, the United States, and the Asia Pacific region. The Company operates through Oil Sands, Conventional, and Refining and Marketing segments.
Long-suffering Canadian energy stocks are beginning to look like real bargains.
CVE shares have shot to a 52-week high after J.P. Morgan upgraded the shares to Overweight from Neutral with a C$14.50 price target (45% potential upside), citing progress on execution of last year's takeover of Husky Energy (OTCPK:HUSKF).
Cenovus shares remain undervalued, yet the Company is in a great position to generate enough free cash flow to buy back its ConocoPhillips' stake.
Last week, Cenovus released 2022e guidance and a 5-year outlook. The Company said that at $75 WTI price, it would be able to generate "excess free cash flow" of $33B over the next 5yrs, or around 100% of the Company's current market cap.
More immediately, Cenovus plans to generate $5.5B of excess free cash flow in 2022 (16% of the Company's current market cap) and will allocate 50%+ to shareholders through buybacks and dividends.
Cenovus management is currently authorized to repurchase ~146M shares or ~7% of shares outstanding.
Over the 5-year forecast horizon, CVE plans to maintain 800kb/d of upstream production (up 4% vs 2021, but flat from 2022e onwards).
Perhaps most importantly, and opposite the Company's 2019 capital markets mishaps, Cenovus plans to reduce capital expenditures over the forecast period (while sustaining production and increasing shareholder returns).
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#4. Cheniere
Cheniere Energy (NYSE:LNG) is an energy infrastructure company that engages in the liquefied natural gas (LNG) related businesses in the United States. Cheniere's terminals on the Gulf Coast allow U.S. gas to be processed and shipped overseas. With the global shift towards cleaner energy sources in full swing, LNG and natural gas bring the benefits of being the cleanest-burning hydrocarbon, producing half the greenhouse gas emissions and less than one-tenth of the air pollutants of coal. Consequently, LNG demand is expected to grow 3.4% per annum through 2035, with some 100 million metric tons of additional capacity required to meet both demand growth and decline from existing projects. Natural gas use in power generation capacity is expected to grow by an additional 300 GW by 2040, equivalent to 300 million tonnes of LNG, with the majority of that demand coming from Asia, especially China, India, and other Southeast Asia countries.
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That marks natural gas/LNG as the only fossil fuel that will experience any kind of growth over the next two decades. Goldman sees a strong ramp in contracted U.S. LNG export capacity and solid exposure to spot pricing for remaining volume helping Cheniere record free-cash-flow growth of ~50% from 2021 levels. Indeed, LNG could record even stronger growth, with Woodmac saying adoption of carbon capture and storage(CCS) technology could massively boost the sector's green credentials at little extra cost.
It's a major tailwind for Cheniere, given its already strong market share.
#5. Northern Oil and Gas
Minneapolis-based Northern Oil & Gas (NYSE:NOG) is an independent energy company that engages in the acquisition, exploration, exploitation, development, and production of crude oil and natural gas properties in the United States.
NOG has just come out with a competitive and unique dividend plan, with the base dividend set to grow 20% per quarter, until reaching 33c/s quarterly in 2023 (1.32/s annualized or 7.1% yield).
The base dividend is built around $50 WTI and $3 Henry hub price assumptions, leaving breathing room from today's levels.
NOG has an authorized share buyback program in place ($68m, ~5% of the market cap) and will plan to repurchase shares and pay special dividends if current commodity prices sustain. The company's management left the door open for "growth"; however, it appears to be focused on inorganic growth, providing a path to building the business without adding rigs and crude supply to the market.
By Alex Kimani for Oilprice.com
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