Oil prices surged to 10-month highs last week after OPEC+ members Russia and Saudi Arabia unexpectedly extended voluntary production cuts through the end of the year. Thanks in part to some rare positive economic news out of China today, crude futures for October delivery (CLV23) continue to hover around those highs, not too far below $90 per barrel.
Analysts had already hiked their oil price forecasts through the end of 2023 on expectations for tight supplies and an eventual rise in demand from China. Now, following the latest news on production cuts, Goldman Sachs is warning of potential triple-digit oil prices.
Not all energy stocks are set to benefit equally from rising crude - but here, we bring you three top picks from the sector that look well-positioned to benefit if oil continues to climb.
Permian Resources
Founded in 2007, Permian Resources (PR) is one of the largest independent oil and gas producers in the Permian Basin, the most prolific U.S. oil and gas basin. The Texas-based company has a market cap of $8.09 billion and has a healthy dividend yield of 2.1%.
Notably, shares of the company are up 53% so far in 2023 - widely outperforming the Energy Select Sector SPDR Fund (XLE), which is up 6.2% over the same period.
Permian Resources posted a mixed set of numbers for the second quarter ended June 30, as revenues beat the consensus estimate but earnings fell short. Net revenues for the quarter came in at $623.4 million, up 31.8% from the previous year. EPS for the quarter stood at $0.27, down 54.2% and below the consensus estimate of $0.33. In fact, over the past five quarters, the company's EPS has missed estimates in three out of the past five quarters.
However, the oil and gas producer's production metrics remained solid, with yearly growth in average daily net production for oil, natural gas, and natural gas liquids production.
To further consolidate its presence in the larger Permian Basin, the company acquired Earthstone Energy in an all-stock deal worth $4.5 billion. Earthstone has a significant inventory of high-quality, low-cost oil and gas resources. The combined company will have roughly 300,000 barrels of oil equivalent per day (BOE/D) in production and over 400,000 Permian net acres.
Analysts remain upbeat about Permian Resources, which has a consensus “Strong Buy” rating and a mean target price of $15.58. This indicates upside potential of about 10.6% from current levels. Out of 12 analysts covering the stock, 9 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 2 have a “Hold” rating.
Hess Corp
Next up on our list is the more than century-old oil and gas exploration and production company, Hess Corp (HES). The company currently commands a market cap of $49.29 billion and has operations in the US, Canada, Libya, Guyana, and Thailand, among others. Hess offers shareholders a dividend yield of 1.01%.
Hess stock has performed respectably well in 2023, up 12.4% on the year - lagging the broader equities market, but easily outperforming the XLE.
Notably, for investors looking to closely track the commodity's performance, the share price for this upstream oil name has a strong correlation with oil prices, as proxied by the US Oil Fund (USO) on the chart below.
The latest quarterly results from Hess were mixed. Revenues of $2.3 billion were down 22.3% year over year, and missed the consensus estimate of $2.4 billion. EPS for the quarter came in at $0.65, significantly lower than $2.15 in the year-ago period - though it managed to surpass the consensus estimate of $0.52. Notably, the company's EPS has consistently surpassed expectations in each of the past five quarters.
Hess also reported an increase in production during the second quarter. Net production was 387,000 BOE/D in Q2 2023, compared with 303,000 BOE/D in Q2 2022, primarily due to higher production in Guyana and the U.S. Bakken. Further positive news around production emerged as Hess raised net production guidance for 2023 to 385K-390K BOE/D from the previous range of 365K-375K BOE/D, largely due to the expected startup of the Payara development early in the fourth quarter and projected strong operational performance.
Taking all this into account, analysts remain cautiously optimistic about HES, with a consensus “Moderate Buy” rating and a mean target price of $165.94 - indicating upside potential of about 4.5% from current levels. Out of 15 analysts covering the stock, 7 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 7 have a “Hold” rating.
Gulfport Energy
We round out our list with Gulfport Energy (GPOR), which was founded in 2004 by former executives of Chesapeake Energy (CHK). Gulfport, worth $2.25 billion by market cap, is one of the largest independent oil and natural gas producers in the U.S., and is a leader in the development of horizontal drilling and fracking technology.
Shares of Gulfport are up an impressive 60% year to date, outperforming not only XLE but also the broader equities market. However, it does not offer investors any regular dividends, unlike our other two featured oil and gas stocks.
In its latest quarterly results, Gulfport reported revenues of $304.7 million - down by 34.5% from the prior year, but above the consensus estimate of $240.3 million. On the other hand, EPS fell short, arriving at $1.85 against expectations for $2.13.
Gulfport increased its production volumes in the second quarter to 1,039.3 MCFE/D from 959.1 MCFE/D in the year-ago period. The company attributed the rise in production to its “strong operational execution and realized consistent cycle time improvements on the operational planning, drilling and completions front.” Further, Gulfport raised its production guidance for 2023 to 1,035-1,055 MCFE/D from 1,000-1,040 MCFE/D.
Analysts are considerably bullish on GPOR, judging by the consensus “Strong Buy” rating on the stock and mean target price of $139. This implies expected upside potential of more than 18% from current levels. Moreover, it's the only stock on our list to have a unanimous “Strong Buy” rating from all the analysts (six, in this case) covering the stock.
Final Takeaway
Despite the hype around electric vehicles (EVs) and clean energy, the dominance of oil to serve global energy needs in the here and now continues unabated. This is underscored by the fact that two of Warren Buffett's top holdings continue to be old-school energy names like Chevron (CVX) and Occidental Petroleum (OXY).
If higher oil prices are here to stay, all of the stocks mentioned above look like solid investment choices. This is not only because some of them pay dividends (which provides stability of income) and have gained the confidence of the analyst community, but they are also aided by strong fundamentals and macroeconomic tailwinds.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
