As global demand slumped, oil and gas stocks witnessed a sharp correction in the first half of 2020. With monetary and fiscal policy action, oil prices stabilized. Furthermore, production cuts by the OPEC also supported oil prices after an initial plummet. The Invesco DB Energy Fund (NYSEARCA:DBE), an exchange-traded fund with exposure to worldwide energy futures, fell 37% in that period.
With an aggressive vaccination drive globally, the economic outlook has improved. The International Monetary Fund expects global GDP growth for 2021 at 6.0%. Further, growth for 2022 is expected at 4.4%. As economic growth accelerates, energy prices are likely to trend higher.
Brent oil is already trading at $70 per barrel. Even with incremental supply from Iran, analysts at Goldman Sachs (NYSE:GS) believe that oil is likely to touch $80 per barrel in the foreseeable future. Given this outlook, oil and gas stocks are likely witness sustained positive momentum.
It’s also worth noting that the Federal Reserve is likely to keep interest rates artificially low. Easy money is good news for precious metals, industrial commodities and energy prices.
I believe that it’s still a good time to consider exposure to oil and gas stocks. Let’s talk about seven stocks that look attractive at current levels.
- Equinor (NYSE:EQNR)
- Chevron (NYSE:CVX)
- Marathon Oil (NYSE:MRO)
- Transocean (NYSE:RIG)
- Lundin Energy (OTCMKTS:LNDNF)
- Aker BP (OTCMKTS:DETNF)
- Borr Drilling (NYSE:BORR)
Oil & Gas Stocks With More Upside: Equinor (EQNR)
Equinor stock has been in an uptrend with oil trending higher. Considering the quality of assets, I believe that the stock is among the top oil and gas stocks to consider. EQNR stock also offers a current dividend yield of 2.7% and it seems likely that dividends will increase in the coming year.
I believe that with six billion barrels of oil equivalent of resources, Equinor is well positioned for sustained production growth. Between 2019 and 2026, the company expects annual production growth at 3%. Importantly, the company’s assets have an average break-even oil price of $35 per barrel. Therefore, even at $60 per barrel, Equinor is positioned to generate healthy cash flows.
For the current year, the company expects organic capital expenditure of $10 billion. Further, for the next two years, capital expenditure is planned at $12 billion on an annual basis. Even with this level of investment, Equinor is positioned to deliver positive free cash flows.
Equinor has also been investing in the renewable energy segment. By 2026, the company expects to have a renewable portfolio of 4-6 GW. Furthermore, the portfolio is likely to expand to 12-16 GW by 2035.
Overall, EQNR stock looks positioned for further upside. As the Johan Sverdrup asset contributes to incremental production at a break-even of $20 per barrel, FCF is likely to swell.
Chevron Corporation (CVX)
CVX stock has been trading sideways in the last three months. This seems like a good accumulation opportunity before the next leg of the rally. Besides the upside potential, Chevron stock has an attractive dividend yield of 5.16% among oil and gas stocks.
Chevron has a robust balance sheet to aggressively invest in production growth projects as oil trends higher. For the current year, the company expects capital expenditures of $14 billion. Further, between the next year and 2025, annual capital expenditure is expected at $15 billion (mid-range). Therefore, robust investments will translate into production and cash flow growth.
It’s also worth noting that for the first quarter of 2021, the company’s operating cash flow was $4.2 billion. This would imply an annualized OCF of $16.5 to $17.0 billion. In other words, the company’s investment plan will be funded through internal cash flows. Dividends also look sustainable considering the balance sheet strength and a bullish outlook for oil.
Another point I like about Chevron is the fact that the company has a reserve replacement ratio (RRR) of 99% in the last five years. With a robust resource base, exploration activity is likely to ensure that RRR remains strong. This provides multi-year cash flow visibility even after discounting aggressive production across key assets.
Marathon Oil (MRO)
Marathon Oil is another attractive name among oil and gas stocks. Even after an upside of 112% in the last one-year, MRO stock looks attractive.
With higher oil price, Marathon has been focused on debt reduction. For Q1 2021, the company achieved $500 million in gross debt reduction. Further, for the year, the company expects to reduce debt by $1.0 billion.
With corporate free cash flow at $35 per barrel, the company is positioned for value creation. For Q1 2021, the company reported free cash flow of $443 million. This would imply an annualized FCF of $1.6 billion. Therefore, Marathon is positioned for de-leveraging as well a sustained dividend.
The company also has a healthy reserves base. To put things into perspective, management expects to hold Q4 2020 production flat through 2025 with an annual investment of $1 billion to $1.1 billion. Therefore, if oil sustains above $60 per barrel, Marathon is positioned for annual FCF in excess of $1.5 billion over the next few years.
For Q1 2021, the company raised its quarterly dividend by 30% to 4 cents from 3 cents per share. The possibility of dividend growth is another stock re-rating factor in the medium-term.
As energy prices slumped at the onset of the pandemic, the offshore drilling sector was among the worst hit. Transocean survived at a time when several offshore rig companies declared bankruptcy. In the last one-year, RIG stock has surged by 177%. It seems that the worst is over for the sector and the stock is positioned for further upside.
With oil trading above $60 per barrel, Transocean has witnessed gradual order inflow. Currently, the company has $7.4 billion in order backlog with a bulk of the orders from investment grade companies. As order inflow accelerates, Transocean is well positioned for higher revenue visibility in the next few years.
Further, as of March 2021, the company reported $2.5 billion in total liquidity. Considering the current backlog, the company expects to maintain a healthy liquidity profile over the next two years. Therefore, Transocean is well positioned to survive.
It’s also worth noting that if oil sustains well above $60 per barrel, day-rate will improve. The company is also likely to receive orders with a longer duration. EBITDA margin expansion is likely in the coming quarters.
Amid the crisis, Transocean has also engaged in asset transformation. Currently, 100% of the fleet is in the ultra-deep-water and HE floaters segment. A modern fleet will also help in boosting the order backlog as industry recovery accelerates. RIG stock therefore looks attractive at a market capitalization of $2.3 billion.
Lundin Energy (LNDNF)
The Johan Sverdrup project is a potential game-changer for Lundin Energy. The company holds 20% stake in the project, which is the third largest oil field on the Norwegian Continental Shelf.
To put things into perspective, the Johan asset has 2.2-3.2 billion barrels of oil equivalent (boe) in gross reserves. Furthermore, the full field break-even is below $20 per barrel. With oil above $60 per barrel, robust EBITDA margin can be expected.
For Q1 2021, Lundin reported production of 183 million boe/day. For the full year, the company has guided for production in the range of 170-190 million boe/day. Phase two of Johan Sverdrup is likely to deliver first oil by Q4 2022. This provides production upside visibility in the next few years. The company has guided for production in excess of 200 million boe/day by 2023.
It’s worth noting that for Q1 2021, the company reported oil price realization of $61.1 per barrel. At the current production level, free cash flow was $526 million. Therefore, the company is positioned for FCF in excess of $2.0 billion.
Therefore, Lundin Energy has ample financial flexibility to invest in new projects for sustaining production. Further, with an attractive break-even, the company has financial flexibility to increase dividends. LNDNF stock currently has an attractive dividend yield of 3.39%.
Aker BP (DETNF)
DETNF stock has surged by 81% in the last six months. Aker BP still looks attractive among oil and gas stocks considering the asset base and oil price break-even.
For Q1 2021, Aker BP reported production of 222,200 boe/d with robust production from Valhall, Johan Sverdrup and Alvheim assets. Importantly, the company’s production cost was $8.6 per barrel for the quarter. This helped Aker deliver operating cash flow of $900 million.
Similar to Lundin Energy, a key reason to like Aker BP is the company’s stake in the Johan Sverdrup asset. However, it’s also worth noting that the company plans to sanction projects with more than 500mmboe of resources before the end of 2022.
Therefore, with a strong asset base, the company is positioned for sustained production growth. Further, Aker BP reported free cash flow of $558 million for Q1 2021. With robust FCF, the company can sustain dividends and invest in production growth projects. As of Q1 2021, the company had a total liquidity buffer of $3.8 billion and a low leverage ratio of 1.2x.
Overall, DETNF stock looks attractive with oil above $60 per barrel. Production growth coupled with low break-even oil price would imply that FCF remains above $2.0 billion on an annualized basis. This will help the company pursue aggressive investment in growth projects.
Borr Drilling (BORR)
Borr Drilling is among the penny oil and gas stocks to consider. At 92 cents, BORR stock looks attractive as oil price trends higher.
As an overview, Borr Drilling is an offshore drilling company with a modern rig fleet. With rising oil price, offshore drilling activity has accelerated. The company seems well positioned to benefit from this tailwind.
It’s worth noting that since the beginning of the year, the company has been awarded 17 new contracts or extensions. This has increased the order backlog by $458 million. By the end of Q2 2021, the company expects to have 13 operating rigs.
Further, the contracts are at an average day-rate of $85,600. Borr believes that day-rates can touch $100,000 in the foreseeable future. If the warm stacked rigs — those that are idle but operational — and rigs under construction are operational, the day-rate will translate into a potential EBITDA of $255 million.
If day-rates indeed touch $100,000 and Borr Drilling can de-leverage, the stock is likely to surge from current levels.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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