In early and mid-2020, the Oil/Energy sector was devastated, with the space left for dead due to the unprecedented turmoil caused by the COVID-19 pandemic. While most businesses were hit hard by the coronavirus-induced lockdowns, the demand destruction and price plunge associated with oil and gas were like no other.

Image Source: Unsplash

But have things changed! Fast forward to December 2021 and the year could well be construed as one of stunning recovery for the energy market. Profits across the space have bounced back from last year's pandemic-driven slump in consumption and prices. With crude rallying past $70 and natural gas trading around 45% above the year-ago levels amid macro tailwinds, the sector components have reacted very positively to this robust investment landscape.

Energy watchdogs have made it quite clear that global demand for oil and gas will not fall anytime soon. This should probably put a floor beneath prices. Given this backdrop, it will be fruitful to invest in top-ranked stocks that stood out in 2021 and have a chance of outperforming in 2022 as well. We recommend Canadian Natural Resources (CNQ - Free Report), PDC Energy (PDCE - Free Report), SM Energy (SM - Free Report), Imperial Oil (IMO - Free Report) and Marathon Oil (MRO - Free Report).

The Great Energy Revival

Taking investors on a roller coaster ride, crude has made a rebound for ages — from the depths of minus $38 a barrel in April 2020 to reclaim a seven-year high above $85 in October. While it has pulled back somewhat due to uncertainties associated with the latest COVID strain, the general trend has been positive.

The widespread development/distribution of vaccines, economic recovery around the world and increased mobility have aided fuel demand. Just recently, the four-week average for petroleum demand stood at an all-time high of 23.2 million barrels a day, indicating little reason for concern at this point. On the other hand, U.S. commercial stockpiles are down nearly 16% since mid-March.

In other words, oil looks well-positioned with a supportive macro backdrop and robust fundamentals. Apart from COVID-19 vaccine rollouts, the ongoing government stimulus and the OPEC+ cartel’s calibrated production policy have contributed to this positive setup. There is also a marked improvement in fuel demand on the back of rebounding road and airline travel.

The story is positive on the natural gas front as well. Higher cooling demand in the summer months on the back of record-breaking heat, hurricane-related disruption in supplies and strong liquefied natural gas (“LNG”) export demand are the key reasons why the fuel has soared in 2021. The commodity recently topped $6 per million British thermal units (MMBtu) for the first time since 2014 and reached a 13-year high settlement of $6.312 in October.

Why the Momentum Is Likely to Continue Into 2022

Much of the positive argument is simply a bet on stronger economic growth in America and the subsequent improvement in end-user fuel usage. The newly introduced $1 trillion mega infrastructure bill will be another major catalyst for the U.S. markets, thereby supporting stronger crude prices. The unleashing of pent-up travel demand will also pave the way for oil demand growth in 2022. Further, fears of a slowdown in oil demand recovery from the Omicron variant are starting to subside, with the strain likely to be less deadly than expected. At the same time, available vaccines might be effective in neutralizing it.

Moving to natural gas, there is a stable demand catalyst in the form of continued strong LNG feed gas deliveries. LNG shipments for export from the United States have been robust for months on the back of environmental reasons and record higher prices of the super-chilled fuel elsewhere. Most analysts believe that deliveries appear poised for further gains this year and the next on surging consumption in Europe and Asia, especially as we head deeper into winter. The circumstances are particularly dire in Europe where a gas supply is running low with the need for a steady refill from the United States ahead of the peak winter period. At the same time, promised flows from Russia have been limited.

5 High-Flying Energy Stocks With Potential for Further Gains

After solid year-to-date gains for most energy companies, investors might wonder which stocks’ rally can continue in the days ahead. To this end, we suggest adding names that have room to increase further from a fundamental perspective. In other words, while investors will essentially be buying high, they hope to sell even higher.

Here, Zacks’ proprietary methodology comes in handy. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. 

We have picked five stocks with a market capitalization of more than $1 billion that have gained more than 50% so far in 2021 but have the potential to move up further next year based on their inherent strengths.

The chart below shows the price performance of our five picks so far this year.

(Click on image to enlarge)

Image Source: Zacks Investment Research

Our Choices

Canadian Natural Resources (CNQ)

This Calgary-based energy major boasts a diversified portfolio of crude oil (heavy as well as light), natural gas, bitumen and synthetic crude oil. CNQ’s balanced and diverse production mix facilitates long-term value and reduces the risk profile thereby lending its results a high level of stability. Lower capital expenditure needs, accretive acquisitions and improving operational efficiencies are other positives in the Canadian Natural story, which allowed the company to generate a significant free cash flow of C$2.2 billion (post capital spending and dividends) in the most recent quarter.

CNQ has an expected earnings growth rate of 11.1% for next year. The Zacks Consensus Estimate for Canadian Natural's 2022 earnings has been revised 9.1% upward over the last 60 days. CNQ, carrying a Zacks Rank #1, has gained around 72.3% year to date.

PDC Energy (PDCE)

PDCE is an independent exploration and production operator with the Wattenberg Field in Colorado being its chief operating region. Following the SRC Energy deal last year, PDC Energy has emerged as the second-largest oil producer in the DJ Basin to go with its existing Delaware acreage. The company has a favorable debt maturity and its credit facility currently has a total borrowing base of $2.4 billion.

PDC Energy has a projected earnings growth rate of 29.1% for 2022. PDCE’s consensus estimate for the next year has been revised 18.3% upward over the past 60 days. PDC Energy carries a Zacks Rank #1 and its shares are up 141.3% since the beginning of 2021.

SM Energy (SM)

SM Energy is an oil and gas explorer in North America. The company’s top-tier, balanced and diverse portfolio of proved reserves, as well as development drilling opportunities, is expected to create long-term value for its shareholders. Given SM Energy’s increasing focus on crude oil, specifically in the Permian Basin and Eagle Ford regions, we believe that the company is in a good position to capitalize on strong realizations in the coming days.

SM Energy has an expected earnings growth rate of 276.8% for the next year. The Zacks Consensus Estimate for the upstream explorer's 2022 earnings has been revised 80.6% upward over the last 60 days. SM Energy, carrying a Zacks Rank #1, has rocketed around 374.3% year to date.

Imperial Oil (IMO)

IMO’s integrated business portfolio of upstream and downstream assets provides it with a high level of stability, reducing the risk profile of the company. Strong execution and ramped-up activities in Kearl, Cold Lake and Syncrude projects positions the company for solid production growth and are expected to augment its revenues and earnings going forward. Imperial Oil's strong balance sheet, its ability to generate cash flow and a shareholder-friendly policy should also favor the stock, apart from the majority held by ExxonMobil.

IMO has an expected earnings growth rate of 40% for next year. The Zacks Consensus Estimate for Imperial Oil's 2022 earnings has been revised 12.2% upward over the last 60 days. The #2 Ranked IMO has rallied around 88.1% so far this year.

Marathon Oil (MRO)

Marathon’s robust operational metrics suggest strong long-term cash flows that should support higher price points for the shares. The wells drilled by MRO have extremely low oil price breakeven costs and need oil prices of just $35 a barrel to be profitable. Marathon continues to cut down costs substantially and is striving to achieve a 30% decrease in production and G&A costs in 2021 compared to the 2019 levels. Further, the company’s significant debt maturities mostly fall after 2025 and as such, there does not appear to be much risk here.

Marathon Oil has a projected earnings growth rate of 71.6% for 2022. MRO’s consensus estimate for next year has been revised 41% upward over the past 60 days. Marathon Oil carries a Zacks Rank of 2 and its shares are up 143.4% since the beginning of 2021.