2023-04-04 14:00:00 ET
Summary
- March Madness gave way to a banking crisis that shocked the global markets, followed by OPEC+ announcing a surprise cut of ~1.2M barrels of oil per day.
- Energy was the best-performing sector in 2022, maintaining the title into 2023 with XLE +12% over one year.
- Although the energy sector has lost some of its luster YTD, ‘Strong Buy’ picks in the energy sector could experience an uptrend on firm demand and global supply reductions.
- According to a Goldman Sachs report, oil could top $107/barrel by the end of 2023. On the back of strong fundamentals and potential OPEC cuts, I’ve picked two oil and gas stocks to capitalize on.
- Fuel remains at the forefront of rising prices. With Saudi attempts to curb the oil market as the Fed tries to curb inflation, those companies able to produce solid FCF at $70/barrel should crush results if WTI reapproaches $100/barrel.
OPEC+ cut spells oil & gas buying opportunity
OPEC is trying to control the price of oil, and the ensuing outcome is higher oil prices. As of the announcement , WTI was +9%, counterproductive for the Fed's fight against inflation. By cutting its supply, OPEC reduces the amount of oil available on the global market, which creates a supply shortage. This shortage can cause prices to increase because buyers are willing to pay more for the limited oil available. Additionally, reducing supply may lead to increased competition among buyers, further driving prices.
The price increase resulting from OPEC's supply cuts can have positive and negative impacts. On the positive side, it can benefit oil-producing countries that are members of OPEC by increasing their revenue. These are some of the core drivers that should benefit many oil stocks. On the negative side, it can lead to higher fuel costs for consumers and businesses, impacting economic growth and inflation. Because the FED is trying to tame inflation, a rise in fuel will only affect headlines, and the Fed is more concerned about core inflation. Reversals in inflation caused by higher oil prices will result in volatility. But where tensions between Saudi Arabia and the U.S. may flare, the cuts to approximately 1.2M barrels per day spell buying opportunities for those willing to take some risk on quant, Strong Buy-rated stocks in the oil and gas sector.
Investing in energy stocks
Energy has been a big benefactor as investors have looked for upside and dividend yield in the battle against inflation. Growth stocks with value are not that difficult to come by. But it's key to ensure they possess solid fundamentals should markets decline.
We know the Fed plans to tighten monetary policy, which still allows many stocks insulation from a high-interest rate environment. Integrated oil and gas exploration is a great industry that could benefit as OPEC makes cuts. Although Saudi leadership "is making its oil production decisions with a clear eye to their own economic self-interests," said Helima Croft , head of commodity strategy at RBC Capital Markets, the benefits to those companies having to replenish reserves are sitting pretty. Output will have to increase, which conflicts with green initiatives, but analysts at Goldman Sachs Research already project oil back to $107 a barrel by year-end. Should oil rise to this occasion, this bodes well for some dividend-paying stocks, including my picks. With several high-quality oil companies producing solid free cash flow at $70/barrel, a jump back to $100/barrel bodes exceptionally well.
Stocks with solid value, strong growth, profitability, momentum, and revisions are best equipped to capitalize on a potential rally. Focusing on stocks with strong fundamentals using screener tools can help minimize risks, and for these reasons, I've selected Cenovus Energy Inc. ( CVE ) and Suncor Energy ( SU ).
Quant Grades Display Strong Fundamentals On A Sector Relative Basis
Nothing crude about 2 oil & gas stocks for a potential rally
The top-performing sector of 2022 keeps impressing as the one year leader. Through 2023, XLE is up +12%, and despite a sharp sell-off for many oil and gas stocks, my two energy stock picks have strong fundamentals that have allowed them to gain year-to-date, with the OPEC shock offering a potential opportunity tailwind. Focusing on quality is a great way to navigate the uncertain environment while growing a portfolio with sound companies based on strong financials and healthy free cash flows. Nothing crude about oil prices surging more than $5/bbl after OPEC's announcement. Consider my two stocks for a portfolio.
1. Cenovus Energy ( CVE )
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Market Capitalization: $36.25B
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Quant Rating: Buy
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Quant Sector Ranking (as of 4/3): 35 out of 248
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Quant Industry Ranking (as of 4/3): 2 out of 17
With its subsidiaries, Canadian-based Cenovus Energy develops, produces, refines, and distributes crude oil and natural gas worldwide. Experiencing rapid growth on the heels of its 2020 merger with Husky Energy, Husky's value-added excess refining brings diversification and a pipeline for marketing to new clients and storage resources. Although Cenovus had weak Q4 earnings results, its discounted valuation, strong fundamentals, and WTI developments could benefit long-term investors.
Cenovus Energy Stock Momentum & Valuation
Showcasing a B- valuation grade, CVE comes at a solid discount. With a forward P/E ratio of 8.4x, the stock trades at a discount to peers of 6%, in addition to its tremendous forward PEG of 0.10x, a -92.45% difference to the sector.
With bullish momentum, investors are continuing to purchase shares of the stock to drive the price higher. YTD, Cenovus Energy is +4%, and the stock is up nearly 8% over the last year. Where some investors may fear the volatility in energy stocks, oil prices are being pushed higher, which could mean more growth and profits for Cenovus.
Cenovus Energy Stock Growth & Profitability
Despite a Q4 2022 Earnings miss, CVE is focused on reducing debt while creating low-cost integrated energy to support cash flow and shareholder returns. With the recent acquisition of bp-Husky Toledo Refinery , of which CVE already owned 50%, heavy oil capacity is expected to increase by 160,000 bbls/d, including 90,000 bbls/d of heavy oil to bring CVE's total downstream capacity to ~740,000 bbls/d. Following last week's surprise decision by OPEC to slash output, Cenovus should benefit from demand. With summer season around the corner, it's like Deja Vu, and we could see U.S. gasoline prices hit new highs again - +$4 and more pain at the pump, putting money in the pockets of those willing to consider stocks like Cenovus.
All things considered and more potential energy-driven inflation, as oil trends up, Cenovus may be able to deliver more to its shareholder than the $3.4B in 2022 through buybacks and dividends. Despite a fourth-quarter EPS of $0.29 miss and revenues 8% less than anticipated, OPEC's cuts may serve as a tailwind. With Cenovus' 2023 corporate remaining unchanged, it could benefit as QatarEnergy entered into a farm-in agreement that provides sizeable exploration stakes in offshore Newfoundland & Labrador, operated by ExxonMobil. According to an SA News Report , "QatarEnergy agreed to acquire a 28% interest in license EL 1167, with Exxon ( XOM ) owning 50% and Cenovus Energy ( CVE ) 22%, and a 40% stake in license EL 1162, with Exxon holding 60%; financial terms were not disclosed." With an A+ growth grade and A- profitability grade, these tailwinds, along with Cenovus's solid fundamentals, make for a great potential buying opportunity, which is why CVE is rated 'Strong Buy,' along with my next pick.
2. Suncor Energy Inc. ( SU )
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Market Capitalization: $43.63B
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Quant Rating: Buy
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Quant Sector Ranking (as of 4/3): 39 out of 248
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Quant Industry Ranking (as of 4/3): 3 out of 17
Canadian integrated oil and gas company Suncor Energy Inc. explores, develops, and produces energy products. Cheaply valued and +9% YTD, this stock has the potential to capture more upside on the heels of OPEC's announcement of cutting oil. Where supplies for oil may be tight, Suncor has plenty to go around. Although increased output may go against sustainable initiatives pursued by energy companies to minimize environmental impacts, shortages are likely to spell higher oil prices, which means greater profits for producers.
Suncor Energy Stock Momentum & Valuation
Strongly bullish, Suncor Energy is being actively purchased by investors, who drive its share price higher, as displayed by its YTD increase of more than 9%. Although Suncor has underperformed energy peers Cenovus, Occidental Petroleum, and Chevron, it's likely one of the reasons it's trading at such a discount.
With a forward P/E ratio of 7.38x versus the sector 8.97x, a 17.70% discount, a current cashflow yield of nearly 14%, and a dividend yield of 4.45%, SU looks very attractive. Factor in its debt reduction and buyback plans for 2023 and Suncor is primed for growth.
Suncor Energy Stock Growth & Profitability
Suncor Energy is on a mission to return cash to its shareholders. With WTI prices already on an uptick following OPEC's production cuts, SU is likely to benefit, despite being downgraded by Scotiabank due to safety and performance issues. Suncor Energy produced record operation cashflow resulting from surging 2022 oil and gas prices and will hopefully revise guidance given their conservative estimates now that the environment has changed. Not only has its surplus of cash, which includes a $11.58B cash hoard, helped maintain its dividend track record, SU has also been able to pay down debt.
SU paid down $3.2B of debt to strengthen its balance sheet and returned $7.7B to shareholders, a nearly 45% of AFFO for a 13% cash yield. With a Q4 2022 EPS of $1.36, beating by $0.03, and revenue of $10.39B beating by 17.93% Y/Y, Suncor declared another quarterly dividend , which has had a strong showing for 12 years.
Boasting a five-year dividend growth rate of 8%, and a current 4.54% dividend yield, the company's ability to pay dividends to help ease inflation's pain has been solid.
As expressed by SA author Michael Wiggins De Oliveira , the beauty of SU is that the company is "Fully focused on capital returns…Suncor's whole narrative is one of returning capital to shareholders. Suncor's Q4 2022 results saw the company increase its dividend payout to CAD$0.52 per share, annualized at a 4.3% yield." Not only can investors draw on the value of the stock and its discounted valuation, with WTI on the rise, but Suncor's balance sheet may also improve, allowing it to deliver even greater shareholder value. Consider Suncor and Cenovus Energy for your portfolio - a gas injection for the second quarter.
Conclusion: Is now a good time to buy oil and gas stocks?
OPEC is a powerful cartel that controls a significant portion of the world's oil supply, and its decisions can significantly impact oil prices. Energy prices have dipped from their 2022 peak levels that had not been seen in decades - a time when I pondered, could energy be the new tech stocks? Although oil prices have been on a rollercoaster ride, slowing on concerns of higher interest rates and slowing economies, OPEC's surprise production cut could mean tremendous upside for stocks in oil and gas.
Oil and gas stocks with fair valuations can offer a great way to capitalize on their momentum. In the current environment, they can offer significant growth plus value and diversify a portfolio. Where tighter monetary and fiscal policies were expected to result in market declines, consider my two integrated oil and gas stocks Cenovus and Suncor, with strong analyst upward revisions. Each stock is undervalued with robust fundamentals, primed to take advantage of the OPEC cuts. If you're not a fan of my picks, consider Top Growth Stocks , which include oil and gas.
For further details see:
Gas Injection: Cenovus And Suncor Erupt