2022 has brought us crazy volatility and some serious cross currents in the commodities markets. Rising inflation is putting downward pressure on demand, but increased prices in commodities, especially oil and other fuels, is partly to blame for that inflation – and consumers simply cannot cut all demand for fuel.
At the same time, supply chains are still tangled, and the return of severe lockdown policies in China are impacting both supply and demand in the world’s second largest economy – and putting added pressure on major export hubs. It adds up to a picture of slowing overall demand growth in 2022.
But the key turning point for commodity markets in 1Q22 came in Eastern Europe, where Russia’s invasion of the Ukraine put a whole host of disruptive factors on exports from both countries. Recall, Russia is one of the world’s largest hydrocarbon producers, while Ukraine is deeply involved in natural gas transport, and both countries together account for some 25% of global wheat exports.
Against this backdrop, Evercore analyst Stephen Richardson has picked out two oil producers as his ‘Best Ideas’ in the current environment, and ahead of their upcoming earnings releases. And he’s not alone in his bullish outlook. According to TipRanks database, both tickers carry a Strong Buy consensus rating from the rest of the Street. Let’s take a closer look.
We’ll start by looking at ConocoPhillips, one of the energy sector’s largest companies, with a market cap over $118 billion and more than 1.5 million barrels of oil equivalent produced daily last year. The company operates in 14 countries, and boasts annual revenues of $46 billion.
ConocoPhillips has a commitment to return profits to shareholders, and it had plenty to work with in 2021. The company posted earnings of $6.07 per share last year, up from a $2.51 per-share loss in the prior year, and returned $6 billion to shareholders through dividends and buybacks. The company has a current dividend payment of 46 cents per common share, annualizing to $1.84 and yielding 2%. For 2022, ConocoPhillips has already announced that it plans to return up to $8 billion to shareholders.
The energy industry drips money, as well as oil, and ConocoPhillips ended last year with $5.8 billion in cash and liquid assets on hand. The company saw its top line grow year-over-year every quarter in 2021, and its full year top line was up 145% from 2020. Investors responded, and in a general market environment that has seen the S&P 500 decline 10% so far this year, COP shares are up by 36%.
All of this prompts Richardson to take a bullish stance on the company, as he writes: “At COP we see upside to street cash flow expectations and a portfolio that will benefit from both domestic and global natural gas trends with integration of recent acquisitions. COP remains a core long term holding thanks to the certainty of its return framework and strong Upstream cash flow generation. The stock was potent during 1Q and rallied +40% benefitting from the commodity upswing and an elevated buyback program…”
The Evercore analyst predicts a strong Q1 for COP, and we will see on May 5 how that holds out. In the meantime, he rates the stock an Outperform (i.e. Buy) and his $122 price target suggests a one-year upside of 25%. (To watch Richardson’s track record, click here)
Wall Street finds itself in broad agreement with Richardson’s outlook here. This stock has 14 recent reviews, including 12 Buys against just 2 Holds, for a Strong Buy consensus rating. Shares are priced at $91.66 and their $126.54 average target implies an upside of 38%. (See COP stock forecast on TipRanks)
Diamondback Energy (FANG)
The second stock we’ll look at, Diamondback, might not have the storied history of ConocoPhillips, but the Texas-based firm is still a major player in the North American energy scene. Diamondback is a $22 billion hydrocarbon production company, active in the Permian Basin of its home state of Texas, where it generated over 375K barrels of oil equivalent per day in 2021. In the last quarter of the year, production averaged slightly higher, at 387K barrels daily.
Diamondback will release its 1Q22 results on May 3, but we can look back at 4Q21, and the full year results, to get an idea of where the company stands.
The company’s high production generated some $3.94 billion in operating cash flow last year, of which $2.42 billion was free cash flow. As of the end of last year, the company had 1.78 billion barrels of oil equivalent in proven reserves, for a 36% year-over-year gain. Of that, 52% is oil and the remainder is natural gas and gas liquids. Diamondback’s quarterly revenues have been growing steadily since the 2Q20, and in 4Q21 hit $2.02 billion. Quarterly EPS, at $3.63, easily beat the $3.37 forecast.
Looking forward, Diamondback is guiding toward 369 to 376 thousand barrels of oil equivalent in daily production for 2022, and expects to generate $5.8 billion in cash from operations. This guidance is in line with the 2021 actual figures, and with higher prices in the oil markets, it will automatically generate higher revenues.
Diamondback has used its strong cash flow to fund a growing dividend. The most recent declaration saw the company bump the quarterly payment by 20%, to 60 cents per common share. This annualizes to $2.40 and gives a yield of ~2%. The company has publicly committed to return 50% of cash to shareholders.
Richardson’s comments on Diamondback emphasize the company’s ability to produce, and to return to investors: “Execution and cost control are core elements of the E&P business in any environment and the 1Q update should emphasize how FANG can drill wells faster at a lower total cost than most in the Permian. The Williston assets were still in the mix last quarter so 1Q should be a cleaner representation of both production and cash margins. Also last quarter mgmt suggested it would continue targeting a base dividend payout of $3/sh (annualized) and could get there by the end of 2022 through modest quarterly increases.”
“FANG has lagged the sector YTD and we expect solid execution, a model well insulated from oil field inflation and a kick up in shareholder returns post 1Q results to allow the stock to reassert,” the analyst summed up.
In line with these comments, Richardson rates FANG an Outperform (i.e. Buy), and sets a $170 price target, indicating room for 31% share appreciation in the coming year.
Wall Street definitely agrees with this bullish stance. FANG stock has no fewer than 20 recent reviews, and these break down to 18 Buys and 2 Holds to support the Strong Buy consensus view. The average price target stands at $179.45, impaling ~39% upside from the current trading price of $129.47. (See FANG stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.