10 analyst favorite energy stocks as OPEC cuts oil production

The cartel agreed on Wednesday to cut production by two million barrels per dayaccording to dispatches.

William Watts explained why the OPEC+ Group’s actual production cuts may not go as planned.

Below is a screen of analysts’ favorite energy stocks polled by FactSet, drawn from the S&P 1500 Composite Index.
XX:SP1500.

The screen is followed by a longer-term review of oil prices and industry commentary from Gabelli analyst Simon Wong.

Oil strainer

An easy way to play US energy companies as a group is to track all 21 stocks in the S&P 500 energy sector, which you can do with the Energy Select Sector SPDR fund.
XLE.

The large cap sector is dominated by Exxon Mobil Corp.
XOM

and Chevron Corp.
CLC,

which together make up 42% of XLE due to market cap weighting. The ETF is not as diverse as some investors might expect.

To dig deeper for a stock screen, we started with the 62 stocks in the S&P 1500 Composite Index, which is made up of the S&P 500
SPX,

the S&P 500 Mid Cap Index
ENVIRONMENT

and the S&P Small Cap 600 Index
SML.

We then narrowed the list down to 53 companies each covered by at least five analysts surveyed by FactSet.

Here are the 10 energy stocks with at least 75% “buy” or equivalent ratings that have the highest 12-month upside potential, based on consensus price targets:

Any stock screen has its limitations. If you’re interested in the stocks listed here, it’s best to do your own research, and it’s easy to get started by clicking the tickers in the chart for more information on each company. Click on here for Tomi Kilgore’s in-depth guide to the wealth of free information on the MarketWatch quotes page.

Setting a price floor for oil and gas producers

On September 20, I published this opinion piece: Four reasons why you should buy energy stocks now if you’re a long-term investor.

It included a chart showing how the oil industry has reduced capital spending as demand has increased over the past few years through 2021. It was a big reversal from previous oil cycles and highlighted how much the Oil producer management teams have been focused on not cutting out their own legs by flooding the market and killing their own profits.

Here is a 10-year chart showing the movement of West Texas Intermediate Crude Oil
CL

prices, based on first month rolling contract prices compiled by FactSet:

Leaving aside the temporary price collapse during the first phase of the coronavirus pandemic in 2020, when a collapse in demand led the industry to run out of storage space, you should turn your attention to the price action for West Texas Intermediate (WTI) crude in 2014, 2015 and 2016. It turns out that the success of the U.S. shale industry brought its own turmoil, as prices crashed to levels that meant that some producers were losing money on every barrel of oil they pumped.

Domestic producers are now very careful not to repeat their mistake of overproduction.

And that begs the question: can we estimate a magic number for WTI at which US producers will not only remain profitable but can continue to raise dividends and buy back shares?

Gabelli’s Simon Wong went with a conservative guess during an interview. Existing shale wells could be mined for as little as $10-20 a barrel, he said, but it’s the nature of shale mining that new wells must continually come online to sustain supply. Wong estimated that the price of WTI would need to average $55 a barrel to break even from a new well.

Going further, he said a conservative estimate for U.S. shale producers to break even would be $65 a barrel.

“Companies have built their cost structures on $60 oil. I still think at $80 they’ll generate a lot of free cash flow,” he said, noting continued stock buybacks and dividend increases at that level.

He added: “A year ago we were happy when oil was at $75.”

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