3 Outperforming Gas & Oil Stocks Showing Signs of Confidence
BP (NYSE:BP) reported excellent Q4 2023 results on February 6. It continued the cavalcade of excellent fourth-quarter reports from oil and gas stocks.
However, despite oil and gas companies’ cash flow bursting at the seams, the Energy Select Sector SPDR Fund (NYSEARCA:XLE) is down 1.7% compared to a 6.0% gain by the S&P 500.
BP is not one of the S&P 500’s oil and gas stocks, so for this article, I won’t consider it one of my three selections to buy for 2024. Instead, my choices will come from the 23 companies held by XLE.
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What are the criteria for selection?
It’s all about free cash flow to net income and cash and marketable securities to total debt. The higher, the better for both ratios. It also wouldn’t if the three names had dividend yields higher than XLE’s average of 3.52%, but that’s not a dealbreaker.
EOG Resources (EOG)
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The three stocks are listed in order of the product of the two percentages from highest to lowest.
While EOG Resources (NYSE:EOG) converts less of its free cash flow to net income than the other two on my list, the strength of the balance sheet more than offsets the free cash flow conversion shortfall, I use income instead of EBITDA (earnings before interest, taxes, depreciation and amortization) because it’s a GAAP (generally accepted accounting principle) while EBITDA is not.
EOG is one of the leading producers of oil and natural gas in the United States. For 2023, it expects to produce 982 MBoed (one thousand barrels of oil equivalent per day) at the midpoint of its guidance. Approximately 97.3% is from the U.S., with the remaining 2.7% from its Trinidad operations.
Based on analyst estimates, revenue and earnings per share in 2023 should be $23.76 billion and $11.73 billion, respectively. EOG stock trades at 9.6 times the EPS estimate. Both earnings and revenue are down from 2022 due to lower realized oil and gas prices.
It declared a special dividend of $1.50 per share in the third quarter. In 2023, it paid out $5.89 in regular and special dividends. Based on its current share price, the shares yield 5.3%. Without the $2.50 special dividends, its shares yield 3.1%, a reasonable, if not spectacular, yield.
A total of 35 analysts covering EOG stock with 22 rating it a “Buy” with a price target of $139.63, 26% higher than where it’s currently trading.
Baker Hughes (BKR)
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The last time I wrote about Baker Hughes (NASDAQ:BKR) was likely shortly after it combined with General Electric’s (NYSE:GE) oil and gas business in July 2017.
The oil and gas equipment and services company has come a long way in the past seven years. It expects EBITDA profits of $4.3 billion in 2024 at the midpoint of its guidance, up 14% from 2023. Despite headwinds in its business due to a slowdown in the oil and gas industry, it expects 2024 revenue of $27.5 billion.
The most growth-oriented part of its business is its New Energy unit, which is part of its Industrial & Energy Technology (IET) operating segment. The company’s carbon capture technologies continue to generate significant growth.
In 2024, it expects $900 million in new energy orders at the midpoint of its guidance. It’s tripled its new energy orders since 2021, when it started its carbon capture focus to reduce emissions. In 2023, its new energy orders were $750 million, 45% higher than in 2022.
Thanks to 14% order growth in 2023, its revenues jumped 21% to $25.51 billion from $21.16 billion a year earlier, generating a total segment operating income of $3.06 billion, 31% higher than a year earlier.
Based on a 2024 EPS estimate of $2.02, it trades at a reasonable 14.4 times earnings. For people investing in oil and gas stocks, this is a must.
Coterra Energy (CTRA)
Source: Shutterstock
Coterra Energy (NYSE:CTRA) is a leading oil and natural gas producer. Its operations include the Permian Basin in Texas (307,000 acres), the Anadarko Basin in Oklahoma (182,000), and the Marcellus Shale in Pennsylvania (183,000).
Its current reserves have more than 15 years left. In Q3 2023, 72% of its production was from natural gas, 14% from oil, and 14% from NGL (natural gas liquids). However, from a revenue standpoint, oil accounted for 51%, with natural gas (36%) and NGL (13%).
In 2023, the company expects production of 660 Mboe/d. Revenue for 2023 is predicted to be $5.87 billion, 35% lower than a year ago, with a 53% decline in EPS to $2.30.
In December, Yahoo Finance reported Wells Fargo analyst Roger Read’s positive comments about Coterra. The analyst also upgraded the stock to “Overweight” from “Equal Weight.”
“Over the past 12 months, mgmt has deftly orchestrated a turnaround for the company,” Read wrote to clients.
“The company has been outpacing its production outlook for FY’23 and increased its production guidance for two consecutive quarters. Given continued operational efficiency gains and strong well performance, we would not be surprised if the company positively revises its 3- yr outlook in February.”
Coterra reported its Q4 2023 results on Feb. 22 after the markets closed. Read has a $30 target price for CTRA stock, 24% higher than where it’s currently trading. Other analysts are lukewarm about the stock. Of the 28 that cover it, 13 rate it a “Buy,” with a $31.24 target price, 29% higher than its current share price. If you are looking for the top gas and oil stocks, you can’t go wrong with any of these.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
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