9 Oil and Gas Stocks to Buy During Mideast Conflict
Mideast conflict will destabilize oil prices.
Crude oil prices posted their biggest one-week gain since June after a drone attack on Saudi Arabia temporarily knocked out more than half of the nation's production capacity. Prices eased a bit after an initial spike on reports that Saudi production will be back online sooner than feared. However, geopolitical tensions among the U.S., Saudi Arabia and Iran remain elevated. Any potential military action in the Middle East or additional attacks on production facilities could trigger an extended period of elevated global oil prices. Here are nine of the best energy stocks to buy following the Saudi attack, according to CFRA.
Cabot Oil & Gas Corp. (ticker: COG)
Cabot is a U.S. petroleum producer that focuses mostly on natural gas in the Appalachian region. Analyst Stewart Glickman says Cabot's biggest selling point is its valuation, with the stock trading at just 12.3 times forward earnings. Glickman says Cabot has an appealing combination of low development costs and strong free cash flow. The current stock buyback program represents 8% of shares outstanding, which should support earnings per share even if low gas prices persist. CFRA has a "strong buy" rating and $27 price target for COG stock.
ConocoPhillips (COP)
ConocoPhillips is one of the largest independent exploration and production companies in the world. Glickman says ConocoPhillips management has been taking a more conservative approach to business since 2014, and those efforts have paid off in a persistently weak oil market. The stock pays a 2% dividend, but CFRA's projected payout ratio is below 30% through 2020, suggesting opportunity for a dividend hike. Glickman says bullish catalysts include a new Eagle Ford rig in 2020 and production growth in the Permian Basin. CFRA has a "strong buy" rating and $75 price target for COP stock.
Chevron Corp. (CVX)
Glickman says Chevron should soon start to generate significant cash flow from its recent liquid natural gas projects. In addition, Chevron management has said 70% of its capital expenditure in 2019 will begin returning cash flow within the next two years. Even after being outbid for Anadarko, Glickman says Chevron can grow upstream production organically by 3.5% annually through 2021. Chevron shares trade at 15.2 times forward earnings and pay a 3.8% dividend at just a 59.4% payout ratio. CFRA has a "buy" rating and $136 price target for CVX stock.
EOG Resources (EOG)
EOG is one of the largest U.S. exploration and production companies. Glickman says the company's focus on returns over production growth has served it well in recent years. EOG has boosted both production and free cash flow while reducing completed well costs. In addition, Glickman says its enhanced oil recovery technology could be a production driver in the future. Glickman says EOG is likely to benefit from a higher geopolitical risk premium in oil prices following the Saudi attack. CFRA has a "strong buy" rating and $110 price target for EOG stock.
Kinder Morgan (KMI)
Kinder Morgan is one of the largest midstream energy companies, and its businesses include natural gas pipelines, liquids terminals and carbon dioxide production. Glickman says Kinder Morgan has adjusted its business model following the 2015 oil price collapse and now takes a much more conservative approach to growth. He says Kinder Morgan will continue to benefit from demand for natural gas processing and delivery. The stock also pays a 4.7% dividend, which is completely covered by its cash flow. CFRA has a "buy" rating and $23 price target for KMI stock.
Marathon Petroleum Corp. (MPC)
Marathon is one of the largest independent U.S. oil refiners, and the company also owns the Marathon and Speedway gas station brands. Glickman says Marathon's margins were pressured in the first half of 2019 due in part to higher inventory levels, but he says seasonal demand should help alleviate those pressures in the second half of the year. Glickman says Marathon will benefit from a widening of heavy-light crude oil differentials due to new marine sulfur regulations starting in 2020. CFRA has a "buy" rating and $16 price target for MPC stock.
Occidental Petroleum Corp. (OXY)
Occidental went toe-to-toe with Chevron in a bidding war for Anadarko in early 2019 and ultimately prevailed in completing a $38 billion merger deal. Glickman says the Anadarko deal is a "major gamble" given how much it stretches Occidental's balance sheet in the near term. The deal even triggered a credit downgrade by Moody's in August. However, Glickman is optimistic that Occidental will be able to navigate non-core asset sales and capitalize on the synergies that will ultimately make the deal a success for shareholders. CFRA has a "buy" rating and $60 price target for OXY stock.
Pioneer Natural Resources Co. (PXD)
Pioneer is an oil and gas producer that operates primarily in the Permian Basin and Eagle Ford Shale regions. Glickman says Pioneer's skew toward oil has helped it avoid the recent weakness in gas prices, and its completed well costs in the Permian region are relatively low and falling. Glickman says Pioneer shares are significantly undervalued based on earnings and cash flow projections. Given its healthy balance sheet, Glickman says Pioneer should also have the ability to support EPS via buybacks. CFRA has a "buy" rating and $155 price target for PXD stock.
Valero Energy Corp. (VLO)
Valero is the largest independent U.S. oil refiner. Glickman says Valero's heavy exposure to the Gulf Coast region is ideal for a growing U.S. export market. Venezuela remains a risk for Valero in the near term, but Glickman says an increase in Western Canadian heavy oil imports in the second half of the year will boost margins heading into 2020. Changes to marine sulfur laws should also increase demand for diesel and Glickman says Valero has plenty of cash flow for a dividend hike. CFRA has a "buy" rating and $95 price target for VLO stock.
Best oil and gas stocks to buy during Mideast tension:
Cabot Oil & Gas Corp. (COG)
ConocoPhillips (COP)
Chevron Corp. (CVX)
EOG Resources (EOG)
Kinder Morgan (KMI)
Marathon Petroleum Corp. (MPC)
Occidental Petroleum Corp. (OXY)
Pioneer Natural Resources Co. (PXD)
Valero Energy Corp. (VLO)
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