EC The Top 10 Oil Stocks For Rising Oil Prices

The September 16th strike on Saudi Arabia’s oil facilities sent oil prices skyrocketing as much as 15% in a single day. It was the biggest one-day jump in the past decade. While oil prices gave back some of the gains over the next two days, oil prices still posted an impressive jump for the week.

Top Oil Stock #10: Helmerich & Payne (HP)

Helmerich & Payne provides contract drilling services primarily to inland oil and gas producers in the U.S. The company generates 86% of its revenues from U.S. onshore production and it is the market leader in its business.

Due to the downturn of the energy sector, Helmerich & Payne incurred losses in 2016 and 2017. However, the energy sector has begun to recover in the last two years, with the number of active rigs more than doubling off its bottom. As a result, Helmerich & Payne has been profitable the last two years.

The company still has a long way to go to return to its pre-crisis earnings, as oil producers have become markedly conservative in their budgets and try to operate within the limits posed by their cash flows.

On the bright side, the growth prospects are promising for Helmerich & Payne. U.S. oil production has kept posting new all-time highs for several years in a row and is expected by EIA to keep climbing to new all-time highs for many more years.

While some analysts have raised concerns over peaking shale oil production in the upcoming years, a recent report shrugged off these concerns and stated that U.S. shale oil production will continue rising for about a decade before it peaks. This certainly bodes well for the growth prospects of Helmerich & Payne.

As the production and investment decisions of oil producers are essentially determined by the prevailing oil prices and future forecasts, Helmerich & Payne’s earnings are very sensitive to the underlying oil prices. Those who have great confidence in the sustained boom of U.S. oil production and expect higher oil prices in the upcoming years should consider Helmerich & Payne.

It is also important to note that Helmerich & Payne is a high dividend stock with a 6.0% yield, and has a much stronger balance sheet than its peers, with no debt maturities until 2025.

Source: Investor Presentation

This is of great importance, as the cyclical nature of the energy sector can cause prolonged and excessive losses to the highly leveraged players.

Overall, Helmerich & Payne offers strong upside in the scenario of higher oil prices, with tolerable downside risk from its current stock price in the event of a downturn. If the recovery of the energy sector continues over the next five years, Helmerich & Payne is likely to offer an 8.1% average annual return, mostly thanks to its 6.0% dividend.

Top Oil Stock #9: Eni (E)

Eni is a major oil and gas producer based in Italy. It has exploration activity in more than 40 countries and operates in three segments: exploration & production, gas & power and refining & marketing.

In contrast to the other integrated oil majors, such as Exxon Mobil, Chevron and BP, Eni is much less diversified and much more leveraged to the price of oil. To provide a perspective, its upstream segment generated 92% of its operating income in 2018.

The pronounced sensitivity of Eni to the oil price was prominent in the downturn of the energy sector. While all the oil majors saw their earnings plunge, Eni was the only one that posted hefty losses for two years (2015 and 2016) and the only one that cut its dividend.

On the other hand, thanks to its high leverage to the oil price, Eni is better positioned than its peers to benefit from a potential surge in oil prices. It is in prime position to capitalize on higher prices, as the company expects to grow its production by approximately 3.5% per year on average until 2025.

Source: Investor Presentation

Growth will be driven by the start-up of several growth projects. We expect Eni to grow its earnings per share by 5% per year on average over the next five years.

In addition, thanks to its upcoming growth projects, the company expects its upstream division to achieve free cash flows around $22 billion in the period 2019-2022. If the oil producer meets its own guidance, it will achieve a dividend coverage ratio above 2.0.

Eni stock trades at a price-to-earnings ratio of 13.5, which is higher than its 10-year average of 12.5. If the stock reverts to its average valuation level over the next five years, it will incur a 1.5% annualized drag on its returns. Based on the 6.0% dividend and 5.0% annual earnings-per-share growth, Eni is likely to offer a 9.5% average annual return over the next five years.

Overall, Eni is much more leveraged to the oil price than the other oil majors and thus it is likely to offer superior returns in a scenario of higher oil prices.

Top Oil Stock #8: Chevron (CVX)

Chevron is the third-largest publicly traded oil major in the world in terms of market cap, behind only Royal Dutch Shell and Exxon Mobil. It has a more balanced structure than Eni but it is less diversified than the other oil majors. More precisely, it produces oil and natural gas at a 61/39 ratio but prices a significant portion of its gas based on the oil price.

As a result, about 75% of the total output of Chevron is priced based on the price of oil. This means that Chevron is less leveraged to the oil price than Eni but more leveraged to the oil price than all the other well-known integrated oil majors.

Like most of its peers, Chevron failed to grow its production for a whole decade, until 2017. However, the oil giant has returned to growth mode in the last two years. It grew its production by 5% in 2017 and 7% in 2018 and is on track to grow its output by 4%-7% this year. Moreover, it has provided guidance for 3%-4% annual production growth over the next five years.

A major growth driver will be the Permian Basin. It is remarkable that Chevron has nearly doubled the amount of its estimated reserves in the area in just two years, from 9.3 to 16.2 billion barrels of oil equivalent.

Source: Investor Presentation

Management expects the production in the Permian Basin to reach 600,000 barrels per day by the end of next year and 900,000 barrels per day by the end of 2023. The assets of Chevron in the Permian Basin benefit from zero-to-low royalties and minimal drilling commitments.

In addition, Chevron learned its lesson well from its lost decade and the downturn of the energy sector. It now invests primarily in low-cost, low-risk projects, which are characterized by a high rate of return and begin to generate cash flows within two years of the initial investment. About 70% of this year’s capital expenses will be allocated to growth projects that will begin generating cash flows within the next two years.

Given the promising growth prospects of Chevron, we expect the company to grow its earnings per share by about 7.5% per year over the next five years.

1 2 3 4
View single page >> |

Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.