By Joao Peixe
With sentiment towards oil and gas companies hitting record lows, trying to pick winners in the energy sector can be an onerous and thankless task at a time when fossil fuels are facing a crisis of perception.
Energy stocks are finding themselves in the penalty box due to heightened concerns about ever-rising carbon emissions and the rapid growth of socially-conscious investing, leading to capital fleeing the sector at an unprecedented rate. Over the past decade, the energy sector was easily the biggest laggard in the S&P 500, gaining just 34% over the timeframe according to Refinitiv data. In contrast, the next closest sector, materials, gained nearly 5x as much.
And so far, this unfortunate trend is showing no signs of abating.
The underperformance by the energy sector has carried over to the new year, with the sector’s favorite benchmark XLE down 9.5% YTD vs. 3.6% gain by the broad market benchmark.
With oil and gas prices once again in a bear market; the coronavirus outbreak severely depressing demand and investors cooling off on highly leveraged energy companies, more conservative oil and gas plays are more in favor at the moment.
The good news: some punters think the energy rout won’t last and an oil comeback could be on the cards in the current year, meaning the tide might eventually end up lifting all boats. But it’s going to lift some much more than others.
Here are three stocks for every risk level, large-cap, mid-cap and small-cap that could buck the trend in the oil comeback:
As the largest pure upstream company, ConocoPhillips Company (NYSE:COP) has performed relatively well in this depressed market, generating ample free cash flow and returning a good chunk of it to shareholders.
Unlike many of its peers who continued to expand aggressively during the shale boom, COP has taken several steps to lower costs and fortify its balance sheet leading to one of the best cash positions in the oil patch.
Although the company saw revenue contract 20.3% Y/Y to of $7.71B while adjusted earnings fell 36.5% to $831 million, the oil driller was still able to generate an additional $2.7B in free cash flow during the quarter and added $10B to its stock buyback program to bring the total allocation to $25B.
For the full year, COP generated $11.7B in FCF of which it returned 43% to shareholders and still managed to finish the year with a healthy $8.4B in cash and short-term investments, a 31.3% Y/Y increase.
Source: Company Investor Presentation
ConocoPhillips has been gradually offloading non-core assets, including the sale of its North Sea oil and gas assets for $2.7B and the planned sale of its Australian assets for $1.4B. Its asset portfolio, however, remains healthy.
COP has 13 Buy, 2 Hold and 0 Sell recommendations on TipRanks.
In contrast, integrated oil and gas company ExxonMobil’s (NYSE:XOM) CEO Darren Woods is showing no signs of backing off from the company’s aggressive expansion, even as the likes of BlackRock have made it clear that emissions reductions and addressing the climate issue remains the key issue raised by investors.
Blackrock, the world’s largest asset manager with $7.4 trillion in assets under management, recently joined the Climate Action 100+ that might see the firm push companies like XOM to set specific science-based emissions reduction targets.
Despite dwindling cash flow and returns, XOM has continued pushing hard to increase overall production with aggressive expansion efforts especially in Guyana.
BofA had a strong Buy recommendation for XOM at the beginning of the year citing, ‘‘The inflection in Permian production is well under way while the first oil from Guyana confirmed for December kick starts what we expect to be 7-8 years of growth…”
However, it was recently slapped with a Sell recommendation from Goldman Sachs for “…lack of free cashflow limiting capital returns, and risk to long-term return on capital employed (ROCE) targets.’’
With XOM stock trending downwards for six straight years, some see investing in the company akin to trying to catch a falling knife. XOM has 1 Buy, 9 Hold and 3 Sell recommendations on TipRanks.
Mid-Cap: Hess Corporation
Hess Corp. (NYSE:HES) is an E&P company that develops, produces, purchases, transports and sells crude oil, natural gas and natural gas liquids (NGLs). And even if you hadn’t paid much attention to Hess before, it’s probably already on your radar as the partner in Exxon’s wild offshore Guyana discoveries.
For the fourth quarter, Hess reported revenue of $1.68B (+1.8% Y/Y) while adjusted net loss widened to $180 million, or 60 cents per share from $77 million, or 31 cents per share, during last year’s comparable period. The company pinned the blame for the poor earnings on lower energy prices, with lower natural gas prices more than offsetting higher output from its Bakken shale assets.
Investors have not been pleased with the report, with the mid-cap now 20% from levels printed just three short weeks ago.
The selloff, however, appears overdone. During its earnings call, the company’s management revealed that it has 80% of 2020 production hedged at $55 to $60, or 5.3% above current Brent prices. Meanwhile, cash-flow and production have been exceeding expectations.
Small-Cap: Recon Energy Africa
The Kavango Basin has the same Karoo geology, and it’s also been shown to have the same depositional environment as Shell’s Whitehill Permian shale play, part of the Karoo Supergroup in South Africa.
The 6.3-million-acre (25,000 square kilometers) Kavango Basin is similar in size to the Eagle Ford basin.
And right now, a 90% interest in the exploration license for the entire Kavango basin is owned by one small-cap explorer: Recon Energy Africa (TSX.V: RECO, OTCMKTS:LGDOF), with a market cap of only $40 million and shares selling for under $0.40.
It’s pretty unique for a company this small to have a basin this big, but while few have heard of the company, everyone in the business has heard of the geophysicist who examined the data on this basin. They’ve also heard of Recon’s CEO, Jay Park QC—the former director of Caracal Energy, which was acquired by giant Glencore in 2014 for $1.3 billion.
Bill Cathey is the geophysicist to some majors. When Recon brought the magnetic survey data from Namibia’s Kavango Basin to Cathey, Cathey said the data showed a 30,000-foot sedimentary basin. He also said that a basin this deep, everywhere else in the world, produces commercial hydrocarbons. Management of Recon dropped everything, so the story goes, got on a plane, and finalized the deal for an exploration permit for the petroleum and natural gas rights to the giant Kavango Basin.
Recon has a 4-year exploration license leading to a 25-year production license starting when it has made a commercial discovery.
Sproule–a tier 1 resource assessment company–estimated that Kavango has a potential 12 billion barrels of oil or 119 trillion cubic feet of natural gas. That’s for the shale and doesn’t count any conventional potential.
The first test wells are slated to be drilled in Q2 2020.
Namibia is one of the most oil-friendly up-and-coming oil venues in the frontier of Africa. Ask Shell, or Exxon, both of whom are acquiring assets there.
That’s just a few months away. That’s the key reason why Recon stock is up 293% over the past 12 months.
Bonus: Diversified Oil Companies:
As one of the biggest names in energy, Suncor Energy (NYSE:SU, TSE:SU) has adopted a number of high tech solutions for finding, pumping, storing, and delivering its resources. Not only is it big in the oil sector, however, it is a leader in renewable energy. Recently, the company invested $300 million in a wind farm located in Alberta.
If the next shale boom truly is to be in the oil sands then giants like Suncor is sure to do well out of it. While many of the oil majors have given up on oil sands production – those who focus on technological advancements in the area have a great long-term outlook.
Total (NYSE:TOT) maintains a ‘big picture’ outlook across all of its endeavors. It is not only aware of the needs that are not being met by a significant portion of the world’s growing population, it is also hyper-aware of the looming climate crisis if changes are not made. In its push to create a better world for all, it has committed to contributing to each of the United Nations’ Sustainable Development Goals. From workplace safety and diversity to societal progression and reducing its carbon footprint, Total is checking all of the boxes that the next generation of investors hold close to their hearts.
Enbridge, Inc (TSX:ENB), based in Canada’s oil sands capital Alberta, is an energy delivery company focusing on transportation, distribution, and generation of energy. Operating in the United States and Canada, Enbridge owns and operates the largest natural gas distribution network in Canada and the longest crude oil transportation system in the world. Founded in 1949, investors can feel confident in Enbridge’s experience and market know-how.
Though not strictly dealing in commodities, Enbridge’s diversified assets and connections to a variety of industries position the company as solidified player in many Canadian investors’ portfolio.
TransCanada (TSX:TRP) is a major oil and energy company based in Calgary, Canada. The company owns and operates energy infrastructure throughout North America. TransCanada is one of the continent’s largest providers of gas storage, and owns and has interests in approximately 11,800 megawatts of power generations.
With TransCanada’s massive influence throughout North America, it is no wonder that the company is among one of Canada’s highest valued energy companies. Investors can feel comfortable with the company due to its huge and diverse portfolio, and continuing eye for success.
Franco-Nevada Corporation (TSX:FNV) specializes in securing precious-metal streams, but the company also works in the oil and gas industry. With key assets in some of North America’s most desirable oil and gas plays, including Texas, Oklahoma and Alberta, it is clear that the company has amazing potential in the coming years.
FNV ended 2016 with a relative bang. And as oil and gas prices inch up, investors are watching this diverse company very closely.
Cenovus Energy (TSX:CVE) is most known for its oil business, but it is also actively investing in renewable energy. More importantly, however, is that it has set truly ambitious sustainability goals for itself, aiming to cut emissions by a massive 30% in just 10 years.
This is one of the most actively traded stocks on the TSX. The potential is certainly here for this oil company, so for investors who are bullish on the return of the oil markets, this is a perfect pick in the Canadian market.
By. Joao Piexe
**IMPORTANT! BY READING OUR CONTENT YOU EXPLICITLY AGREE TO THE FOLLOWING. PLEASE READ CAREFULLY**
Forward-Looking Statements. Statements contained in this document that are not historical facts are forward-looking statements that involve various risks and uncertainty affecting the business of Recon. All estimates and statements with respect to Recon’s operations, its plans and projections, size of potential oil reserves, comparisons to other oil producing fields, oil prices, recoverable oil, production targets, production and other operating costs and likelihood of oil recoverability are forward-looking statements under applicable securities laws and necessarily involve risks and uncertainties including, without limitation: risks associated with oil and gas exploration, development, exploitation and production, geological risks, marketing and transportation, availability of adequate funding, volatility of commodity prices, imprecision of reserve and resource estimates, environmental risks, competition from other producers, government regulation, dates of commencement of production and changes in the regulatory and taxation environment. Actual results may vary materially from the information provided in this document, and there is no representation that the actual results realized in the future will be the same in whole or in part as those presented herein. Other factors that could cause actual results to differ from those contained in the forward-looking statements are also set forth in filings that Recon and its technical analysts have made, We undertake no obligation, except as otherwise required by law, to update these forward-looking statements except as required by law.
Exploration for hydrocarbons is a speculative venture necessarily involving substantial risk. Recon’s future success will depend on its ability to develop its current properties and on its ability to discover resources that are capable of commercial production. However, there is no assurance that Recon’s future exploration and development efforts will result in the discovery or development of commercial accumulations of oil and natural gas. In addition, even if hydrocarbons are discovered, the costs of extracting and delivering the hydrocarbons to market and variations in the market price may render uneconomic any discovered deposit. Geological conditions are variable and unpredictable. Even if production is commenced from a well, the quantity of hydrocarbons produced inevitably will decline over time, and production may be adversely affected or may have to be terminated altogether if Recon encounters unforeseen geological conditions. Adverse climatic conditions at such properties may also hinder Recon’s ability to carry on exploration or production activities continuously throughout any given year.
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