Sometimes it’s good to take a worm’s eye view of the markets, to narrow down the search and the market analysis to a particular industry or a particular sector. The zoomed-in view offers some advantages that the macro lacks – greater detail, or a look at opportunities that might get lost in the shuffle of a larger market trend.
And that’s what we have here. Markets are trending down right now, but J.P. Morgan energy sector expert Christyan Malek sees a chance for investors to find an attractive risk-reward in oil stocks. In an attention-grabbing headline, Malek described the energy sell-off as ‘overdone,’ and says that demand remains ‘solid on lower oil.’
“We expect energy demand to prove far more resilient against higher prices and even exhibit a degree of positive elasticity to additional supply given the historically low spare capacity outlook… We see the underperformance of Energy equities as driven by technical positioning, rather than fundamentals. Our Commodities team notes that limited liquidity is driving a wider range of short-term price outcomes, and thus, we would remain buyers of the sectors and advocate investors to add to positions in this pullback,” Malek opined.
At least one stock analyst at J.P. Morgan, Arun Jayaram, has taken this view and run with it, picking out the energy stocks he sees in the best position to show gains going forward. Opening up the TipRanks database, we’ve pulled up the details on two of his stock picks, which could deliver over 50% gains over next year.
Antero Resources (AR)
The first stock we’ll look at is Antero Resources, a ‘pure play’ natural gas exploration and production company operating in the upper Ohio Valley of the Appalachian region. The company’s land assets, totaling over 612,000 net acres in the Marcellus and Utica shale formations in the area where Pennsylvania, Ohio, and West Virginia meet, stand on some of the most productive gas-producing basins in North America.
How productive? Antero averaged over 3.2 billion cubic feet equivalent (Bcfe) per day of natural gas and natural gas liquids production during 1Q22; the liquids fraction of that production totaled 160 thousand barrels (MBbl) daily.
This production generated $465 million in free cash flow for the company during the first quarter. Adjusted net income in Q1 nearly doubled year-over-year, jumping from $183 million to $360 million. The boost came from increases in energy prices in the US. On a per-share basis, this adjusted net income came to $1.15.
All of this indicates a company that is seeing increasing and accelerating growth, a story that caught the attention of J.P. Morgan’s Arun Jayaram.
“We anticipate a solid operational quarter and 10%+ upside to 2Q22 Street EBITDA (JPMe $957 MM vs. STe $853 MM) on pricing strength. We think the real story for the stock is the magnitude of FCF generation anticipated at current strip given AR’s leverage to commodity prices, which should drive a material return of FCF to shareholders as the company executes on its cash returns framework. As a reminder, AR intends to increase the pace of the buyback to more than 50% of FCF from 25% of FCF after paying back its revolver balance ($388 MM at 3/31) in 2Q22,” Jayaram noted.
In line with this stance, Jayaram rates AR shares an Overweight (i.e. Buy), and his $52 price target suggests a 64% upside potential for the year ahead. (To watch Jayaram’s track record, click here)
The J.P. Morgan view is upbeat, but it is no outlier. Of the 8 recent analyst ratings on this stock, 7 are to Buy, outweighing the sole Hold for a Strong Buy consensus rating on the shares. AR is priced at $31.75 and its $49.63 average price target indicates room for ~57% upside over the next 12 months. (See AR stock forecast on TipRanks)
Marathon Oil Corporation (MRO)
The second JPMorgan pick we’re looking at is one of the energy industry’s bigger names, Marathon Oil Corporation. The company specializes in hydrocarbon exploration and production, and spun off of Marathon Petroleum back in 2011 as part of a move by the parent company to streamline operational efficiency. Marathon Oil, based in Houston, Texas, is a $15 billion player in the energy sector and operates in some of North America’s largest and most productive oil basins: the Texas Eagle Ford shale, the New Mexico side of the Permian Basin, and the North Dakota Bakken fields, among others. Like most oil producers, Marathon Oil is not a pure-play, and its asset portfolio is made up roughly half and half of petroleum and natural gas.
The second quarter earnings season is around the corner, and Marathon Oil will be releasing its Q2 results in early August. In the meantime, we can get a good feel for the company’s situation by looking back at the 1Q22 numbers.
Those numbers were sound. At the top line, revenues were reported at $1.75 billion, up 48% year-over-year, while diluted EPS came to $1.02, an impressive 363% gain from the prior year, and significantly higher than the forecast of 96 cents. The current environment of rising oil prices (just go to the corner gas station) has provided support for Marathon Oil, offsetting increased costs.
But rising prices aren’t the only support for Marathon Oil’s high revenues and earnings. The company’s production numbers were strong in Q1, at 281,000 barrels of oil equivalent daily. That total included 158,000 barrels of oil; the rest was natural gas and natural gas liquids.
Operational success is supporting the company’s active profit return policy to shareholders, executed through both dividends and stock buybacks. Dividends are the smaller part of this policy, as the current payment yields only 1.5%. On stock buybacks, Marathon Oil really puts out the cash return effort, and its buyback program has, since last autumn, totaled over $1.6 billion. The total cash return through the end of Q1 reached 16% of the company’s cash from operations.
Cash return was a major point for JPM’s Jayaram, who wrote, “Assuming a 50% return of capital ratio relative to CFO, we estimate that MRO could return ~$2.96 billion to shareholders in 2022 at recent strip pricing, which represents a cash return yield of 20%. We do not expect MRO to add significant volumes to its hedge book during the quarter, with the company messaging a patient approach in this robust commodity price environment.”
“MRO remains one of our top ideas in our coverage space, and we reiterate our OW rating on the stock,” Jayaram summed up.
Jayaram’s OW (i.e. Buy) rating comes along with a $33 price target, indicating his confidence in a one-year upside of 57%. (To watch Jayaram’s track record, click here)
There’s a wider split in the Wall Street analysts’ reviews of Marathon Oil. The stock has picked up 13 recent reviews, including 8 Buys, 4 Holds, and 1 Sell, for a Moderate Buy consensus rating. The stock’s average price target is $33.85, suggesting an upside of ~63% from the current trading price of $20.76. (See MRO stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.