Will oil stocks go up this year? It seems like there’s a perfect storm on the horizon, driving up oil prices to near historic highs. Just imagine it:
- an energy crisis coupled with resurgent, post-pandemic demand;
- dwindling inventories and shrinking supplies;
- OPEC spare capacity about to fall to 4% by the fourth quarter; and, to top it all off,
- geopolitical shenanigans the likes of which haven’t been seen since the Warsaw Pact was last in force.
No wonder Brent Crude Futures are selling for close to $130 a pop.
And yet, despite all these developments, it’s still not entirely clear which way the energy markets will swing.
The diplomatic situation surrounding the war in Ukraine is as opaque as it is unpredictable, with the West still unsure whether it wants to go down the road of full sanctions on Russian oil exports or not. And even though there’s a limited supply of oil at the moment, OPEC could easily be persuaded to up its production, especially since prices are so inflated right now.
But what does seem certain is that any oil leaving Russia is about to be severely curtailed. And, given that the country is the third largest oil producer in the world, that’s a lot of oil being taken off the market in one fell swoop.
If that does happen, there’s a very good chance that oil prices are going to stay high for quite some time to come – which should open up trading opportunities in and of itself. And, with that in mind, here are 3 stocks that will benefit from rising oil prices in 2022.
Energy Select Sector SPDR ETF (XLE)
As oil prices continue to rise, investors looking for broad exposure to the best energy stocks of the S&P 500 Index would be well-served by the State Street Global Advisors’ Energy Select Sector SPDR ETF.
The fund is benchmarked against the Energy Select Sector Index, and is comprised of 21 holdings, representing companies from the oil, gas, services and energy equipment industries.
Although this ETF appears to be fairly well diversified, in reality it’s actually weighted towards its top two companies, Exxon and Chevron, with a 22.71% and 21.30% share of the fund’s holdings respectively.
However, this isn’t a problem; the pair each have superior P/E ratios compared to their peers in the sector, and sport high growth metrics, with Exxon Mobil boasting an increase of 179% in its year-on-year EBITDA number, and Chevron growing its annual revenue by 65%.
Indeed, Exxon is on track to register a record free cash flow metric this year, with analysts expecting upwards of $22 billion in operating cash flow for the first quarter of 2022 alone.
Similarly, Chevron is also likely to be cash rich this year too, and has signaled its intention to double its budget for the annual share buyback scheme to around $5-$10 billion. Both companies have seen their stock value grow by roughly 40% for the year-to-date, and should continue to enjoy significant price appreciation as long as global oil prices remain high.
The remainder of the companies listed in the fund are mostly based in the US, and, having little of their operations centered on Russia right now, should be insulated from the effect of sanctions in that country.
In fact, the ETF has performed well against other energy ETFs of late, clocking in a quarterly increase of 28%, beating, for example, the iShares Global Energy ETF’s return of just 22%.
XLE’s dividend yield of 3.06% is more than double the asset class median of 1.50%, and its 22-year uninterrupted payout history takes it pretty close to dividend aristocrat territory too.
Source: Unsplash
Pioneer Natural Resources Company (PXD)
If the thought of an ETF is just too conservative for your tastes – and you really want to leverage your investment in the oil and gas space while the going is good – an investment in a high-growth energy firm might be a little more fitting.
In that case, the Pioneer Natural Resources Company should do the trick. The firm is an independent exploration and production company operating in the Cline Shale, bringing in $6.1 billion in cash flow from operations over the last year.
With oil prices as high as they are, it’s looking increasingly likely that Pioneer could make over $7 billion in cash flow in 2022. This would allow the company to embark on its planned $4 billion stock buyback program, raise its dividend, and pay down some of its $3.1 billion in net debt.
PXD’s year-on-year levered free cash flow growth is extraordinarily high at 1,100%, as is its EBIT growth of 2,900%. The firm’s EPS for the first quarter 2022 is expected to grow 226% from $1.77 last year to $5.76 this time round, and its share price for the first few months of this year spiked over 30%.
NextEra Energy, Inc. (NEE)
Rising oil prices aren’t just good news for firms directly involved with the fossil fuels industry itself – they also herald a boom for renewable and clean energy stocks as well.
With prices seemingly spiraling out of control, the case for “going green” has never been so strong, and it stands to reason that alternative energy companies should see an uptick in interest in the near future.
Indeed, some businesses are already capitalizing on investor sentiment, as traders turn their gaze towards the sustainable energy market.
The switch to renewable forms of energy is going to cost trillions over the next few decades, and companies pioneering in the carbon-neutral space are going to be the recipients of a large chunk of that money.
One company that leads the field in clean energy is NextEra Energy, Inc., a dividend aristocrat of 26 years and the world’s biggest supplier of wind and solar energy.
The firm recently underwent a pretty huge price correction, falling 23% from $93 on the last day of 2021, to $72 at the end of January this year. However, since the beginning of the Russia-Ukraine crisis last month, NEE’s stock has appreciated 15% to trade at around $83 today.
But NextEra’s price action is just one aspect of the story. The company has arguably one of the best capital structures in the industry, with its cost of debt at a very low 2.5%, due mainly to its excellent credit rating and the low interest rate environment of the last few years.
Furthermore, NEE has a standout ability to generate profits, with a trailing twelve month EBITDA margin of 43%, and cash from operations of $7.55 billion.
The company beat its bottom-line expectations for the fourth quarter by $0.01, bringing in an earnings per share of $0.41. In fact, adjusted earnings momentum was so strong that NextEra revised its EPS guidance through 2025 by announcing projected growth between 6-8% for the next 3 years, while still maintaining its strong credit ratings.
The company’s dividend shows no sign of lagging either, with a recent 10.4% rise taking its quarterly payout from $0.385 to $0.425 per share, bringing its forward yield to a modest yet stable 2.26%.
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