Oil and gas firms struggle to attract investors, which is no secret. The price of crude oil continues to vary, and the energy environment is changing. The sector’s yearly stock performance has trailed behind the S&P 500 over the past five years. According to a 2019 PwC study of oil and gas business leaders and industry analysts, getting investors will be demanding in the future. Many are taking measures to address the issue, while others are not as far advanced. To regain investor trust and cash, oil and gas businesses must continue seeking novel game-changing strategies.
The strong performance of oil and gas equities raises the apparent argument that the most accessible money may have already been made. The energy sector gained about 44 percent year-to-date through April 15, while the S&P 500 declined roughly 8 percent during the same period. (For the record, utilities increased by 6.3% while consumer staples increased by 2.5%.)
Ordinarily, when equities go so far and quickly, additional gains become (at least theoretically) constrained. As future earnings are priced in, and valuations become stretched, analysts have ample cause to become increasingly apprehensive. However, Wall Street believes that at least a few oil and gas equities have significant upside potential.
Table of Contents
Comprehension of Oil and Gas Investments
Price volatility is the primary risk associated with oil and gas ventures. Because of the oversupply of crude oil and natural gas in 2014 and 2015, commodities prices in this sector were highly volatile, and high supply amounts have negatively affected stock values.
In the first quarter of 2020, oil prices plummeted in response to the economic downturn. The Organization of the Petroleum Exporting Countries (OPEC) and its allies agreed to record production cutbacks to stabilize prices, but they fell to 20-year lows.
In the spring of 2020, crude oil prices fell significantly. From nearly $107 per barrel in July 2014 to about $20 per barrel in March 2020, the price of oil decreased. The price of natural gas followed suit, falling from $4.80 per million British thermal units (mmBtu) in June 2014 to about $1.60 per mmBtu in March 2020, a 70 percent decrease. Due to increased demand throughout the winter, natural gas prices are notoriously variable and cyclical. OPEC and OPEC+’s disagreement over production cuts led to a worldwide lockdown, which drove fossil fuel prices to record lows. In April 2020, the price per barrel of West Texas Intermediate (WTI), the standard for U.S. oil, reached a low of -$37.63. This indicates that oil producers paid purchasers to take the commodity off their hands out of concern that storage space might run out by May 2020.
During the first stages of the COVID-19 crisis, oil demand plummeted as lockdowns throughout the globe kept people indoors. However, by the summer of 2021, demand rebounded. Lower commodity prices have harmed the whole industry, not just those firms engaged in oil exploration and production. Oilfield service providers and drilling businesses have suffered from decreased demand for their services. At the same time, production companies cannot generate as much cash due to low pricing.
Advantages of Oil and Gas Investment
It is possible to make money by investing in oil and gas stocks when the price of oil and gas is high. As crude oil prices rise, oil corporations gain vast amounts of cash. By increasing its oil and gas output, servicing debt, repurchasing stock, and paying dividends, it could do all of the mentioned things while also increasing shareholder value. Notably, dividend payouts in the industry tend to be above average due to the amount of cash oil businesses may make during prosperous times. This frequently makes the industry appealing to dividend-focused investors.
Due to the industry’s upside potential during an economic expansion, oil and gas equities may be profitable investments if appropriately purchased. When the economy emerges from a downturn and begins to expand, oil and gas investments made during this period may be profitable.
Risks of Investing in Oil and Gas
Fossil fuels like oil and natural gas continue to be in great demand since they are often less expensive than alternative heating and transportation fuels. In addition, they have a significant infrastructural advantage over developing clean fuel sources such as renewable energy.
However, oil stock investments are riskier than those in other sectors of the stock market due to the following extra risk factors:
The oil and gas industry is often cyclical, so investors are likely to face booms and busts.
In addition to volatility, oil and gas firms must contend with additional external influences. Oil and gas prices have a significant role in determining the market value of oil and gas equities, and when prices are low, these equities are typically punished by the market. When Saudi Arabia and Russia initiated an oil price war in March 2020, causing global oil prices to plunge, oil and gas industry stock values also plummeted.
Oil and gas exploration is fraught with uncertainty. A corporation purchases the rights to an exploration block and then performs tests to assess the presence of oil or gas resources. Before generating any money, the corporation digs test wells to verify the quality of the deposits, then produces wells and links the accompanying infrastructure if they are discovered. Due to the inherent uncertainty of exploration, unsuccessful investments might result in substantial losses.
Environmental issues: During manufacture, transportation, and burning, fossil fuels release greenhouse gases, which contribute to climate change. As a result, governments are exerting a growing amount of pressure on businesses to decarbonize their operations, and oil and gas consumption will undoubtedly decline in the following decades.
Oil and gas are combustible and hazardous, and the pipelines that deliver them span hundreds or thousands of kilometers. Moreover, the apparatus used to extract oil and gas is heavy and intricate. When these conditions are together, an error can have disastrous results. In 2010, BP’s (NYSE: BP) Deepwater Horizon oil disaster in the Gulf of Mexico caused catastrophic damage, for which the company is currently paying.
Oil and gas are one of the riskiest industries for investors. Nonetheless, some oil and gas firms are more secure than others.
How to Invest in Oil and Gas Investment
Oil and gas investments are highly dependent on timing, which is evident from the industry’s success in 2021. At the beginning of the year, crude oil prices soared, with the WTI increasing by more than 50 percent between January and June. Many oil stocks increased by more than 50% in the first half of 2021. COVID-19 pandemic’s demise sparked a global economic rebound, leading to a rise in demand for oil and fuel prices.
Energy prices rose throughout the first and second quarters of 2022 in response to Russia’s invasion of Ukraine. President Biden has taken measures, such as dipping into the Strategic Petroleum Reserve, to control the increase in oil and gas costs (although it seems to have had little impact on prices). It is uncertain if the president will take more dramatic steps to cut energy costs or whether the situation in Ukraine will grow. Thus oil and gas prices may remain unpredictable shortly. With so much uncertainty surrounding the energy markets, it appears that investing in the sector is not the most prudent decision.
Is Investing in Oil and Gas Safe?
Fossil fuels such as oil and natural gas continue to be in great demand since they are often less expensive than alternative heating and transportation fuels. In addition, they have a significant infrastructural advantage over developing clean fuel sources such as renewable energy.
However, oil stock investments are riskier than those in other sectors of the stock market due to the following extra risk factors:
- The oil and gas investment is cyclical, so investors are likely to face booms and busts.
- In addition to volatility, oil and gas firms must contend with additional external influences. Oil and gas prices have a significant role in determining the market value of oil and gas equities. When prices are low, these equities are typically punished by the market. When Saudi Arabia and Russia initiated an oil price war in March 2020, causing global oil prices to plunge, oil and gas industry stock values also plummeted.
- Oil and gas exploration is fraught with uncertainty. A corporation purchases the rights to an exploration block and then performs tests to assess the presence of oil or gas resources. Before generating any money, the corporation digs test wells to verify the quality of the deposits, then produces wells and links the accompanying infrastructure if they are discovered. Due to the inherent uncertainty of exploration, unsuccessful investments might result in substantial losses.
- Environmental issues: During manufacture, transportation, and burning, fossil fuels release greenhouse gases, which contribute to climate change. As a result, governments are exerting a growing amount of pressure on businesses to decarbonize their operations, and oil and gas consumption will undoubtedly decline in the following decades.
- Oil and gas are combustible and hazardous, and the pipelines that deliver them span hundreds or thousands of kilometers. Moreover, the apparatus used to extract oil and gas is heavy and intricate. When these conditions are together, an error can have disastrous results. In 2010, BP’s (NYSE: BP) Deepwater Horizon oil disaster in the Gulf of Mexico caused catastrophic damage, for which the company is currently paying.
Oil and gas are one of the riskiest industries for investors. Nonetheless, some oil and gas firms are more secure than others.
5 Best Oil and Gas Stocks to Buy in 2022
1. Civitas Resources Inc. (CIVI)
Benjamin Halliburton, a chief investment officer of Building Benjamins, predicts that the oil and gas pricing environment will remain elevated for at least two years. “Sanctions on Russia will remain even after the war ends,” he warns. “Years are required to design and develop fields, and the negative regulatory environment for drilling and pipelines discourages exploration and increases expenses.” Civitas is a stock he believes will appreciate in light of the factors mentioned earlier. With a solid balance sheet and rising free cash flow, the company’s shares might reach $110 per share, and its annual dividend could reach $6 per share in the coming year. The price per share on May 24 was $69.13.
2. Chesapeake Energy Corp. (CHK)
This oil and gas stock focuses on shale areas in Pennsylvania, Louisiana, and Texas and anticipates producing between 670 million and 680 million barrels of oil during its fiscal year 2022. As a result of the bankruptcy reorganization, CHK is virtually turned into a new firm with an entirely new management team and a solid financial position. Free cash is on the rise and can be used to pay dividends. The yearly dividend distribution for 2023 is $5.75, and the fair value of the shares is $100. The price on May 24 was $97.87. Limited upward potential, but high yield and little risk.
3. Ovintiv Inc. (OVV)
Ovintiv has a portfolio of holdings in various U.S. states and Canada, with the Anadarko Basin in Oklahoma, the Permian Basin in Texas, and the Montney formation in western Canada serving as the portfolio’s linchpins. Next year, Halliburton anticipates the company’s free cash flow to be transferred from debt reduction to dividends. If this occurs, the company’s yearly dividend distribution may increase from $3.20 to $3.60, according to him. His estimation of the stock’s fair value is $90 a share. On May 24, the company’s stock price closed at $48.92.
4. Phillips 66
Phillips 66 (PSX, 102.38) is a global energy firm that manufactures and distributes fuels. However, the Houston, Texas-based company is also involved in the natural gas trade and sells chemicals and specialty goods worldwide.
This year, the energy firm had some management changes, with the current president and CEO, Greg Garland, being promoted to executive chairman. Effective July 1, Mark Lashier, the current chief operating officer of Phillips 66, will succeed Garland in the top position.
After meeting with company management last month, Phil Gresh, a J.P. Morgan analyst, was comforted about PSX. PSX generated a healthy operational cash flow of $1.1 billion in the first quarter and distributed $404 million in dividends to its shareholders.
Gresh is optimistic that PSX will be able to produce good mid-cycle free cash flows (FCF) – the money remaining after a firm has paid for the capital expenditures required to build its business – over the next few years. He expects the present healthy refining environment to boost FCF, while marketing, midstream, and chemicals should all be nearing mid-cycle.
Exiting CEO Greg Garland repeated this sentiment in the company’s Q1 results press release. “While first-quarter results were lower, we saw substantially improved financial results from our operations in March, and we can expect strong performance continues in the second quarter,” Garland said. “We think the present market circumstances will permit us to boost shareholder returns by resuming share repurchases and raising the dividend. We returned $1.45 billion in debt in April and intended to repay further debts this year.”
Analyst Gresh notes that PSX is wary of “recession risk,” leading to management’s further determination to reduce its net debt. However, it aims to continue distributing 40% of its operating cash flow (CFO) to shareholders.
The top-ranked analyst on TipRanks restated a Buy rating and a $112 price target on the company because he thinks PSX to profit from “a major improvement in diesel cracking, and its needle coke business should also be trending in the right direction.”
According to the average recommendation of Strong Buy and a price target of $112.22, PSX is one of the top energy companies projected to profit more from the rise in oil prices. This average price target shows that, despite a year-to-date gain of more than 41 percent, Wall Street experts expect almost 10 percent more potential for the shares.
5. Occidental Petroleum Corp. (OXY)
Eventually, oil and natural gas prices will decline as high costs depress fossil fuel energy consumption and more excellent production stabilizes the supply-and-demand situation. According to Uri Gruenbaum, CEO of TipRanks, slowing economic development in China and potentially stringent laws to boost alternative energy might affect future oil prices. A rate increase might potentially affect the sector. However, he notes that some experts are more optimistic, resulting in a range of perspectives on popular oil equities. Warren Buffett’s recent acquisition of further Occidental Petroleum stock may provide credence for the positive argument. Berkshire Hathaway Inc. (BRK.A, BRK.B) currently controls more than 15% of the corporation. The average price target for OXY for the next 12 months provided by 20 Wall Street analysts on TipRanks is $70.11. On May 24, the stock price closed at $65.07.
Final Thoughts
Oil and gas investments are highly dependent on timing. This is obvious from the success of the industry in 2021. In the first half of the year, crude oil prices soared, with the WTI increasing by more than 50 percent between January and June. In the first half of 2021, oil stockpiles increased by more than 50% in several places worldwide. To put it another way: The COVID-19 pandemic’s demise was the fundamental engine of economic recovery, leading to a growing demand for petroleum.
As a result of Russia’s invasion of Ukraine, energy prices rose during the first and second quarters of 2022. President Biden has taken measures, such as dipping into the Strategic Petroleum Reserve, to control the increase in oil and gas costs (although it seems to have had little impact on prices). It is uncertain if the president will take more dramatic steps to cut energy costs or whether the situation in Ukraine will grow. Thus oil and gas prices may remain unpredictable shortly. With so much uncertainty surrounding the energy markets, it appears that investing in the sector is not the most prudent decision.
