A Buy Oil
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a buy oil
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Oil is everywhere, and in nearly everything: Our phones, our clothes, our food, and our medicine. It has driven industrial progress and technology. It has shaped our civilization, powered its rise. Despite all this, oil has exacted an enormous price: our climate is changing, smog is smothering cities around the world. That all comes, in part, from burning fossil fuels like oil.
Here at Planet Money, we thought the best way to see into the business of oil would be to get into the business of oil. Today on the show, that's exactly what we're going to do, starting with a briefcase full of cash and plane tickets to Kansas.
Crude oil (opens in new tab) futures, which have already come down well off their highs, fell sharply on Monday amid increased anxiety about demand from China, one of the world's largest energy consumers.
While it's far too soon to bail out on the energy trade (opens in new tab), it's probably fair to say that the easiest of money has already been made. With that in mind, it seemed like a good time to see which S&P 500 exploration and production oil stocks get the highest recommendations from industry analysts.
A quick note on S&P Global Market Intelligence's ratings system: S&P surveys analysts' stock recommendations and scores them on a five-point scale, where 1.0 equals a Strong Buy and 5.0 is a Strong Sell. Any score equal to or below 2.5 means that analysts, on average, rate the stock at Buy. The closer a score gets to 1.0, the stronger the consensus Buy recommendation.
Below please find Wall Street's three highest rated oil stocks to buy now. (Stocks are listed in reverse order of analysts' consensus recommendations, from lowest to highest conviction. Ratings and market data are as of Nov. 28.)
Diamondback Energy (FANG) is an independent oil and natural gas company with production focused in the Permian Basin of West Texas. Shares are up by 33% so far this year, which is actually something of a disappointment.
That's because FANG is actually a sector laggard. The S&P 500's energy sector is sitting on a YTD price gain of more than 60%. But analysts say FANG's relative underperformance just sets it up for more outsized gains ahead. With an average target price of $181.40, the Street gives the stock implied price upside of 26% in the next year or so.
"Management is committed to returning more than 75% of free cash flow to shareholders, with buybacks and variable dividends supplementing the growing base dividend," writes Susquehanna Financial Group analyst Biju Perincheril, who rates shares at Positive (the equivalent of Buy).
Of 30 analysts issuing opinions on FANG, 15 rate it at Strong Buy, 11 say Buy, two call it a Hold and two say sell. That sort of conviction solidifies Diamondback Energy's status as one of the best oil stocks to buy now.
"We continue to believe that a company's balance sheet strength and place on the cost curve are critical, and favor those exploration and production companies that are well positioned to manage a potentially long period of volatile oil prices," writes Argus Research analyst Bill Selesky (Buy). "We believe that COP is one of these companies."
Selesky and other COP bulls emphasize the company's size, scale and combination of "both long-cycle and unconventional short-cycle projects." ConocoPhillips' record of "disciplined investment, strong free cash flow and consistent returns of cash to shareholders through dividends and stock buybacks" also supports the Buy case for long-term investors.
And, like many of the best oil stocks to buy now, COP shares still look relatively cheap. Uncertainty regarding the future course of oil prices has COP stock changing hands at just 9.2 times analysts' 2023 earnings per share (EPS) estimate. That's quite a bargain when compared against the stock's five-year average of 21.2 times projected EPS, per Refinitiv Stock Report Plus.
With that as the backdrop, it should come as no surprise that bullishness abounds on the Street. Of the 28 analysts issuing opinions on COP tracked by S&P Global Market Intelligence, 15 call it a Strong Buy, 9 rate it at Buy, two have it at Hold and two say Sell.
EOG Resources (EOG (opens in new tab)) is another oil and gas exploration and production company that analysts say is primed to pump gushers of free cash flow back to its shareholders.
Of the 29 analysts covering EOG tracked by S&P Global Market Intelligence, 18 have it at Strong Buy, seven say Buy, three call it a Hold and one rates it at Sell. Their average price target of $156.67 gives this oil stock implied upside of about 15% in the next 12 months or so. Add in the dividend yield, and the implied total return is closer to 18%.
Where EOG really stands out is in its valuation, however. Shares change hands at just 8.8 times analysts' 2023 EPS estimate. That's a cheap price to pay for a company forecast to generate average annual EPS growth of nearly 29% over the next three to five years.
A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.
The Organization of the Petroleum Exporting Countries (OPEC) can have a significant influence on oil prices by setting production targets for its members. OPEC includes countries with some of the world's largest oil reserves. At the beginning of 2020, OPEC members controlled about 71% of total world proved crude oil reserves (plus lease condensate), and they accounted for 36% of total world crude oil production in 2020.
OPEC attempts to manage oil production of its member countries by setting crude oil production targets, or quotas, for its members. Compliance of OPEC members with OPEC quotas is mixed because production decisions are ultimately in the hands of the individual members.
The difference between oil market demand and supply from non-OPEC sources is often referred to as the call on OPEC because OPEC members maintain the world's entire spare crude oil production capacity. Saudi Arabia, the largest OPEC oil producer and one of the world's largest oil exporters, historically has had the largest share of the world's spare oil production capacity. Developing and maintaining idle spare production capacity is generally not cost-effective for international oil companies (IOC) because the IOC business model maximizes revenue by producing oil as long as the price of selling the oil is higher than the cost of supplying an additional barrel of oil to market. OPEC spare capacity provides an indicator of the world oil market's ability to respond to real and potential disruptions in world oil supplies.
Geopolitical events and severe weather that disrupt the supply of crude oil and petroleum products to market can affect crude oil and petroleum product prices. These events may create uncertainty about future supply or demand, which can lead to higher volatility in prices. The volatility of oil prices is tied to the low responsiveness, or inelasticity, of supply and demand to price changes in the short term. Crude oil production capacity and the equipment that uses petroleum products as its main source of energy are relatively fixed in the near term. It takes time to develop new supply sources or to vary production, and when prices rise, switching to other fuels or increasing equipment fuel efficiency in the near term is challenging for consumers to do. These conditions may require a large price change to rebalance physical supply and demand.
Given the history of oil supply disruptions caused by political events, market participants constantly assess the possibility of future disruptions. In addition to the size and duration of a potential disruption, market participants also consider the availability of crude oil stocks and the ability of other producers to offset a potential supply loss. When spare capacity and inventories are low, a potential supply disruption may have a greater impact on prices than might be expected if only current demand and supply were considered.
Weather also plays a significant role in the supply of crude oil. Hurricanes in the Gulf of Mexico can affect oil production and refinery operations in the Gulf region. As a result, U.S. petroleum product prices may increase sharply as supplies from the Gulf to other regions drop. Severe cold weather can also strain product markets as producers attempt to supply enough product, such as heating oil, to consumers in a short amount of time. This seasonal demand can also result in higher prices.
Other events such as refinery outages or pipeline problems can also restrict the flow of crude oil and petroleum products to market. These events can lead to a temporary supply disruption that could increase prices.
The influence of any of these factors on crude oil prices tends to be relatively short lived. Once the supply disruption subsides, oil and product supply chains adjust, and prices usually return to their previous levels. 041b061a72