Five Oil and Gas Income Investments to Purchase With Fuel Prices Climbing
By: Paul Dykewicz,
Five oil and gas income investments to purchase as energy prices climb give investors a path to profit.
The five oil and gas income investments to purchase received early support as earnings season began for such companies. U.S. oil and refiners are showing enough to signal some sound investment opportunities, according to BofA Global Research.
The latest Consumer Price Index (CPI) data on Aug. 10 showed that the headline inflation in the United States rose from 3% to 3.2%, with core inflation dipping to 4.7% in July, compared to 4.8% expected by analysts and printed a month earlier, wrote Ipek Ozkardeskaya, a senior analyst with Swissquote Bank. But the rising energy and crop prices threaten to stoke inflation in the coming months, Ozkardeskaya added in an Aug. 11 research note.
“That’s certainly why an increasing number of investors and the Federal Reserve’s Mary Daly warned that this was ‘not a data point that says victory is ours,’” Ozkardeskaya opined.
U.S. crude prices slipped on Aug. 10, after a 27% rally since the end of June, and the latest OPEC data indicated a sharp supply deficit of more than 2mbpd this quarter as Saudi cuts output to push prices higher, Ozkardeskaya wrote. This gap could further widen as global demand continues growing and the shift to alternative energy sources is nowhere fast enough to reverse that upside pressure on energy prices, Ozkardeskaya added.
Five Oil and Gas Income Investments to Purchase: Exxon Mobil (NYSE: XOM)
Exxon Mobil (NYSE: XOM), a multinational oil and gas company in Irving, Texas, appears to be on a growth trajectory, according to BofA’s recent research note. The investment firm placed a buy rating and a price objective of $145 per share on ExxonMobil, based on expected prices of $80 Brent and $75 WTI long-term.
The forecast also assumes long-term Henry Hub natural gas prices of $4.25. The outlook is based on a long-term, post-tax weighted average cost of capital (WACC) of 7.7%. The BofA strategy team assumed a risk premium and a five-year monthly beta.
Key risks to XOM attaining the price objective set for it by BofA include the oil and gas price and margin environment, any significant delays to new upstream projects that are “critical” to the country’s growth and possible inability to capture the price environment due to cost pressures. Potential outperformance could come from increased oil and gas prices, the investment firm added.
Chart courtesy of www.stockcharts.com
Five Oil and Gas Income Investments to Purchase: Energy Select SPDR (XLE)
The top holding in the Energy Select SPDR (XLE) exchange-traded fund (ETF) is Exxon Mobil, said Bob Carlson, who leads the Retirement Watch investment newsletter. Carlson, who further serves as a pension fund chairman, noted that energy stocks are climbing amid rising prices. XOM recently accounted for 21.16% of XLE’s holdings. Carlson spoke positively about the fund as a possible buy for investors who are interested in diversifying their holdings in the energy sector with a single ETF
Paul Dykewicz interviews Retirement Watch leader Bob Carlson.
Jim Woods, who leads investment advisory services, personally recommends Exxon Mobil in the Income Multipliers portfolio of his Intelligence Report investment newsletter. Woods, who also heads the Successful Investing investment newsletter, as well as the Bullseye Stock Trader and High Velocity Options advisory services, has produced profitable returns on his XOM recommendation for his Intelligence Report subscribers.
Paul Dykewicz meets with Jim Woods, head of Intelligence Report.
Five Oil and Gas Income Investments to Purchase: Portia Capital’s Pick
Michelle Connell, who heads Dallas-based Portia Capital, also favors XOM. One of the reasons is that Exxon Mobil’s management recognizes the need to include alternative energy in its portfolio, she added.
Last month, the company announced the acquisition of Denbury, a $4.9 billion Dallas company that focuses on carbon capture and oil recovery, Connell continued. The purchase will help smooth out the seasonality of XOM’s cash flow/revenue, she added.
“The company will benefit from large tax incentives by participating in this green energy segment,” Connell counseled. “In the last few years, the company has been focusing on lowering its costs of its headquarters and personnel. This has included a move up at headquarters from Houston to the Dallas Metroplex. It has also included the lowering or paying down of the company debt. This is expected to continue over the next several years.”
Michelle Connell heads Portia Capital.
With the reduced debt, Exxon Mobil’s balance sheet is strengthening. The company has “strong” free annual cash flow of $5 billion, Connell commented. It also has a dividend yield of 3.4% that is expected to increase to 4% during the next 3-4 years, she added.
Bargain hunters should note that the “stock is cheap,” Connell told me. In the next 12 months, it could have upside of more than 40%, Connell continued.
“It’s current PE is 8.6,” Connell said. “It’s average PE is 17 times. It’s gross margins are now 28%. As recently as 2020, gross margins were only 4%.”
Five Oil and Gas Income Investments to Purchase: Chevron (NYSE: CVX)
Chevron (NYSE: CVX), of San Ramon, California, is the second-largest energy company in the United States. It also is rated as a BofA “buy.” However, its growth is not keeping pace with XOM, the investment firm wrote.
CVX is the second-largest holding of Energy Select SPDR, with 18.58% of the fund’s assets, according to Morningstar. Chevron offers a current dividend yield of 3.8%.
Chevron recently released an update to its senior management team. A “surprise” early retirement led to the departure of Chief Financial Officer Pierre Breber and the promotion of Eimear Bonner from chief technology officer to CFO. Another change is the waiver of the mandatory age requirement of 65 for the chief executive officer. The relaxation of that policy will allow 62-year-old CEO Mike Wirth to continue his tenure beyond that age within three years. Another notable move in the executive suite involves Frank Mount, the vice president of mergers and acquisitions, becoming the head of business development.
Chart courtesy of www.stockcharts.com
Five Oil and Gas Income Investments to Purchase: Hess Oil (NYSE: HES)
Hess Corporation (NYSE: HES) offers a chance to buy shares on a rebound after the company reported net income of $119 million, or $0.39 per share, in the second quarter of 2023, compared with net income of $667 million, or $2.15 per share, in the second quarter of 2022. On an adjusted basis, Hess reported net income of $201 million, or $0.65 per share, in the second quarter of 2023. The decrease in adjusted after-tax results, compared with the prior-year quarter, reflects lower realized selling prices, partially offset by the net impact of higher production volumes in the second quarter of 2023, the company reported on July 26.
BoA rates the stock as a buy with a price objective of $205 per share, assuming $80 Brent and $75 West Texas Intermediate (WTI) long term prices, as well as long-term Henry Hub natural gas at $4.25. The investment firm applies a long-term (post-tax) weighted average cost of capital of 8.5%, which is based on the BofA strategy team’s assumed risk premium and a five-year monthly beta.
However, the stock is not immune from risks such as oil and gas price and margin uncertainty, significant delays to the new upstream projects critical to its growth targets, inability to capture the price environment due to cost pressures from operating expenses, capital expenditures and taxation. Another risk is that news flow around HES’ exploratory and appraisal drilling activities could impact the stock.
Chart courtesy of www.stockcharts.com
Five Oil and Gas Income Investments to Purchase: Ovintiv Inc. (NYSE: OVV)
The “rate of change” is a critical theme driving relative stock performance for standouts such as Denver-based Ovintiv Inc. (NYSE: OVV), a producer of petroleum natural gas and natural gas liquids, BofA wrote in a recent research note. Ovintiv’s early results from its acquisition of properties are spurring enhanced productivity.
BofA set a price objective for Ovintiv of $62, or $84CN, assuming $80 Brent and $75 WTI long-term prices. The investment firm is predicting long-term Henry Hub natural gas prices of $4.25. Henry Hub is a natural gas pipeline in Erath, Louisiana, serving as an official delivery location for futures contracts on the New York Mercantile Exchange (NYMEX).
The investment firm applies a long-term, post-tax weighted average cost of capital (WACC) of 9.7% that is based on the BofA strategy team’s assumed risk premium and a five-year monthly beta. But risks exist that could thwart Ovintiv from achieving the $52 price objective.
The risks include the oil and gas price and margin environment, significant delays to the new upstream projects critical to the company hitting its production targets and potential excess cost pressures from operating expenses, capital expenditures and taxes. Other key risks are possible currency challenges and certain Midland Basin assets closing by mid-2023.
However, a chance to outperform the forecast exists, too. That path might include potentially improving the company’s cost of capital as Ovintiv deleverages its balance sheet, along with a possible increase in oil and gas prices. BofA rates Ovintiv as a buy.
Chart courtesy of www.stockcharts.com
Five Oil and Gas Income Investments to Purchase Face Limited Political Risk from Russia’s War
The three oil and gas stocks to buy should not incur any major political risk from Russia’s ongoing war with Ukraine. One recent development of importance is that a Ukrainian maritime drone reportedly struck a Russian oil tanker on Saturday, Aug. 5.
The attack damaged the tanker’s engine room, according to Russian state media. The previous day, a Russian warship was hit in a maritime drone attack. However, Russia’s ministry of defense claimed its forces killed nearly 600 Ukrainian servicemen on Aug. 11, according to Sky News.
Russia also attacked the eastern Ukrainian city of Pokrovsk on Monday, Aug. 7, in an apparent plot to target rescue workers and first responders. Ukrainian officials described the incident a “potential war crime.” Seven confirmed dead from the attack included five civilians, an emergency worker and a service member, Ukrainian officials said.
The first responders came upon the scene to help victims following a strike from a short-range ballistic missile that hit what Ukraine’s President Volodymyr Zelensky called an “ordinary residential building” in the eastern Ukrainian city’s center. For investors, the five oil and gas income investments to purchase should expose them to fallout from the attacks taking place in the Black Sea that traditionally has been a route for transporting goods from both Ukraine and Russia.
Paul Dykewicz, www.pauldykewicz.com, is an award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.