We are approaching the end of the year and it is time to decide how to allocate the portfolio for solid year-end returns. In a recent note from JPMorgan focused on the energy sector, 5-star analyst Arun Jayaram recommended oil and gas producers likely to outperform general markets in the future.
Quickly getting to the point, Jayaram says, “We remain fans of the long-term natural gas story, driven by a growing global demand for low-cost gas exports from the US.”
With this in mind, we took a closer look at two energy stocks that have received the thumbs up from the JPM expert. In fact, Jayaram is not alone in singing the praises of these stocks. According to the TipRanks platform, they are rated as Strong Buys by the rest of the analyst community.
Permian Resources (PR)
The first is Permian Resources, a Texas-based E&P operating in the Delaware Basin. Permian was formed this year through the merger of equals between Centennial Resource Development and Colgate Energy. Permian Resources emerged from that merger as the largest pure-play E&P company in Delaware. Permian’s productive assets include 180,000 net lease acres and 40,000 royalty acres; these companies generated 137,000 barrels of oil equivalent per day, evenly distributed among oil and gas products.
Permian Resources’ assets are highly valuable and the company’s manufacturing translated into high revenues and earnings in the recently reported 2Q22. Revenue came in at $472.7 million, more than doubling year-over-year from $232.6 million. Earnings, reported at $193.1 million, generated diluted earnings per share of 60 cents. This was a strong reversal from 2Q21, where quarterly earnings fell 9 cents.
This company is currently running a drilling program with 8 rigs, but has worked out a development plan for 2023 that specifies to start with 7 active rigs. Permian’s plans include improving operational efficiency, and the company targets $1.1 billion to $1.3 billion in free cash flow for the full year 2023.
Jayaram, in his JPM report, points to Permian’s free cash flow and production growth as key points for investors, saying of the company, “We expect PR to deliver an attractive combination of significant cash return coupled with differentiated volume growth, as we take a turn among peers at 2023 DACF and with a premium on FCF metrics. PR has set an annual basic dividend of $0.20 per share and will pay at least 50% of the FCF to shareholders after the dividend from 2Q22.”
“PR is also in the top quartile of our updated JPM Forced Ranker, which places the heaviest weight on cash yield and FCF generation, which we consider to be the key metrics for investors. We estimate that PR will yield 10% of the market cap to shareholders in 2023 while also delivering 10% oil volume growth,” Jayaram added.
Jayaram quantifies its position and gives PR an Overweight (ie Buy) rating, with a price target of $12, representing a ~56% increase over the next 12 months. (To view Jayaram’s track record, click here)
Overall, Permian gets a Strong Buy consensus rating from Street, based on 8 analyst reviews, including 7 Buys over 1 Hold. The shares are selling for $7.66 and their average price target of $10.86 suggests a 35% increase over one year. (See PR stock forecast at TipRanks)
EOG Resources (EOG)
The second stock we’ll look at, EOG, is one of the largest E&Ps in the North American hydrocarbon scene. The company has a market capitalization of more than $71 billion and operates in some of the continent’s richest oil and gas regions. EOG has manufacturing operations in Texas, Louisiana, Oklahoma and New Mexico, in well-known areas such as Eagle Ford, Permian, Anadarko and Barnett. The company also operates in Colorado’s DJ Basin, Wyoming’s Powder River Basin, and the Williston Basin on the North Dakota-Montana border. EOG is even active in the Caribbean, with operations in the offshore Columbus Basin off the island of Trinidad.
All of this has pushed EOG’s revenue to record levels. The company reported total revenue of $7.4 billion in 2Q22, its most recent report, after quarterly production of 920.7 MB. Adjusted net income for the second quarter was $1.6 billion, with adjusted earnings per share of $2.74. On its balance sheet, EOG reported just over $5 billion in total debt and approximately $3 billion in cash and cash.
EOG has seen 8 consecutive quarters of consecutive sales increases. Earnings were more volatile, but second-quarter earnings per share were up 58% year-on-year.
Summarizing EOG for investors, Jayaram writes, “We continue to view EOG as a long-term stake in the space given its premium drilling strategy poised to support differentiated returns on capital assuming mid-cycle pricing or better. One of the key themes has been the differentiated performance of E&Ps accelerating the return of cash to shareholders. Cash return to shareholders is more rewarding than debt reduction, which is beneficial for companies with strong balance sheets like EOG.”
The JPM analyst gives EOG an Overweight (ie Buy) rating, and his price target, which he has set at $156, indicates that he is confident of a 28% gain in the coming year. (To view Jayaram’s track record, click here)
Wall Street clearly agrees with Jayaram that this stock is a buy proposal – the 14 analyst reviews on the file include 12 buys and 2 holds. The stock is trading at $121.42 and the average price target of $150.29 implies ~24% upside potential going forward. (See EOG Inventory Forecast at TipRanks)
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Disclaimer: The opinions expressed in this article are those of the recommended analysts only. The content is for informational purposes only. It is very important to do your own analysis before making any investment.