The price of oil keeps rising, and so do the stocks of oil companies. Now some analysts believe the strategy of how to play the rebound is also changing.
For much of the past two years, investors and analysts have focused on oil companies that can cut costs and return more of their profits to investors in the form of dividends and share buybacks. This has led more and more companies to cut their drilling budgets, pay off debts and slow down exploration plans for new oil fields.
But there is a counter-argument to this strategy.
It is now proven that the demand for oil and gas will not go away in the short term, and the next few years will in fact be characterized by high prices and underinvestment. That is why Saudi Arabia is investing in expanding its production capacity from 12 million to 13 million barrels per day, even as US and European oil companies shrink and cut production.
Goldman Sachs analyst Neil Mehta thinks investors should consider companies that have access to long-term oil and gas sources. Mehta chose eight of these companies as potential investments that can pay off over time as oil prices remain high amidst supply shortages.
Goldman predicts the world will use 106 million barrels of oil per day in 2030, against European oil companies’ assumptions that demand will be around 100 million barrels.
The eight stocks are expected to return 18% next year, on average, predicts Mehta.
(ticker: HES) holds a stake in a large oil project off Guyana in partnership with
(XOM) and Chinese company
(883Hong Kong) which is expected to produce considerable amounts of oil over the next decade. Mehta expects the company to increase its cash flow by 15% per year through 2030, from $ 10 per share this year to $ 30 in 2030. He sees the shares jump to $ 106 from $ 92 recently.
Exxon’s project in Guyana and its refining, chemicals and liquefied natural gas divisions give it one of Big Oil’s strongest asset bases, according to Mehta. He sees stocks climbing to $ 68 from $ 62.50 recently.
Pioneer of natural resources
(PXD) holds one of the largest positions in the Permian Basin and Mehta expects to pay dividends for years, literally and figuratively. Pioneer has a variable dividend policy that could offer investors an 11% dividend yield in 2022, Mehta believes. He sees stocks climbing to $ 213 from $ 196 recently.
(OXY) has been chosen for the past two years because it added substantial debt when it bought competitor Anadarko Petroleum. But investors may be overlooking the strength of its resource base in the United States and the Middle East, as well as its chemicals division, Mehta says. He sees stocks climbing to $ 40 from $ 34 recently.
(KOS) is showing promise due to an offshore natural gas project in West Africa that it is building with
(BP), writes Mehta. It is slated to go into service in the second half of 2023. It sees shares jump to $ 4 from $ 3.30 recently.
Mehta also likes three Canadian oil companies –
Canadian natural resources
(CNQ). He believes they have resources that should pump oil for years and deserve more attention from US investors.
Mehta became less positive about
(COP), however. It downgraded its rating to Neutral to Buy based on the company’s outperformance over the past few months. It is up 73% since its February upgrade, compared to 15% for the
He sees a 4% total return for the stock next year, less than other oil stocks.
Write to Avi Salzman at [email protected]