The price of gasoline has dropped sharply in recent weeks, bringing a welcome relief to anyone with a car, but the fact remains that gas is still up more than $1.50 per gallon, on average, since the beginning of 2021. It’s been a major driver of inflation. And according to the latest numbers, for August, inflation remains high, at 8.3% annually.
Much of that number is driven by increases in food and housing costs – but energy prices are also contributing, and this could, longer-term, be a boon for energy investors even as overall markets dive on the news that inflation is not moderating as quickly as had been hoped.
Industry experts – and Treasury Secretary Janet Yellen, too – are predicting shortages of fuel and electricity this winter, with consequent higher costs. Energy stocks are almost certain to gain in such an environment. On average, they are already outperforming the market with the S&P energy index up 47% year-to-date.
Against this backdrop, we’ve used the TipRanks platform to pull up the latest info on two hydrocarbon producers, companies that are poised to gain should prices go up for crude oil and natural gas. Both get Strong Buy ratings from the Street, and both also offer solid upside potential.
Northern Oil and Gas (NOG)
First up is Northern Oil and Gas, an exploration and production company involved in the exploitation of the hydrocarbon resources of Williston Basin of North Dakota and Montana. This is the formation that got the US fracking boom started, and it’s still one of North America’s major oil and gas production regions. In addition to the Williston, Northern also has productive holdings in gas-producing shale formations of New Mexico and Pennsylvania, and has more than 200 million barrels of oil equivalent in proven reserves.
All of that puts Northern in a strong position to gain as product prices go up – and the company has seen rising revenues, rising earnings, and a rising share price all year. At the top line, total revenues hit $441.4 million in 2Q22, a huge increase from the $25.8 million reported in the year-ago quarter. Earnings also are up strongly year-over-year, growing from 92 cents per diluted share in 2Q21 to $1.72 in the current report, an 87% gain.
The solid results have generated plenty of cash, too. NOG reported having free cash flow of $114.3 million in the second quarter. The company has been using its cash to support the stock and return capital to shareholders. Northern repurchased $12.8 million worth of common shares in Q2, and has bought back at least $7.2 million worth of shares so far in Q3. The company also pays out a quarterly dividend, which it started in the June quarter of 2021. The dividend has been paid out for six quarters, and been raised 5 times; the current payment, of 25 cents per common share, is up from 19 cents in the last quarter. At its current rate, it annualizes to $1 and gives a yield of 3.1%.
As can be expected when revenues and earnings show growth of that magnitude, the stock has strongly outperformed. Shares in NOG are up 57% year-to-date; far, far ahead of the 16% year-to-date loss in the S&P 500.
5-star analyst Neal Dingmann, of Truist Securities, sees this company as a sound choice for return-focused investors, writing: “Unlike most E&Ps to date, the company maintained both its 2022 production and CAPEX guidance issued in June. We view the higher than forecasted 2Q22 capital spend as largely positive given the solid organic activity and ground game that we expect will undoubtedly help set up for improved late 2022/2023 production/cash flows. NOG remains focused on its active shareholder returns that continue to run ahead of plans along with a better than maintenance capital type program.”
Dingmann goes on to give NOG shares a Buy rating, and his price target of $63 suggests a robust 97% one-year upside for the stock. (To watch Dingmann’s track record, click here)
Overall, NOG has picked up 8 recent analyst reviews from the Wall Street analysts and these break down 6 to 2 in favor of Buys over Holds, for a Strong Buy consensus rating. The stock is selling for $32 and its $45.25 average price target implies a 41% gain over the next 12 months. (See NOG stock forecast on TipRanks)
APA Corporation (APA)
Next up is APAPA Corporation, the holding company that own Texas-based Apache, another North American oil and gas exploration and production firm. APA’s operations are located mainly the Permian Basin, along the Gulf Coast, and deeper out in the Gulf of Mexico. The company’s portfolio also includes assets and production in the North Sea off the UK and in Egypt’s Western Dessert, as well as exploration rights off the coast of Suriname in the northern part of South America.
APA saw strong production numbers in 2Q22, up to 385,000 barres of oil equivalent per day. The high production generated $1.535 billion in cash from operations, which included $814 million in free cash flow. The FCF was more than double the year-ago figure, attesting to the quality of the company’s assets and its ability to capitalize on rising oil prices. APA expects to generate $3 billion in total FDF this year, and to return some $1.8 billion of that to shareholders through buybacks and dividends. The current dividend is 12.5 cents per common share, has been held at this level for three quarter, and annualizes to 50 cents with a modest 1.25% yield.
The company saw a total top line revenue in the recent quarter of $3.05 billion, up 73% year-over-year, and had net earnings of $926 million, or $2.71 per diluted share. Net income was up 193% from the year before. APA shares have gained as well, and despite highly volatile trading this year are showing a gain of 51%.
This energy stock has caught the attention of Paul Cheng, from Scotiabank, another 5-star analyst, who says of the company: “We continue to follow the cash and think the company’s generous cash return model will ultimately win back investors. Based on our analysis, APA ranks the second best on FCF yield and organic cash return out of 17 major upstream oriented companies under our coverage. We estimate the company could shrink their share base by ~45% between end of 2021 and 2026 under our average WTI price assumption of $79.”
“Operationally, we also think the overall investment case remains intact and believe recent setback in Egypt is only temporary while Suriname continues to offer potential meaningful longer term upside option. The company should also be well positioned to take advantage of the recent strong natural gas market,” the analyst added.
Cheng backs up his bullish commentary with an Outperform (i.e. Buy) rating and a $60 price target that indicates potential for ~49% share gains on the one-year timeframe. (To watch Cheng’s track record, click here)
Scotiabank’s Cheng is hardly the only bull on APA; of the 13 analyst reviews on file, 10 are to Buy against just 3 Holds, for a Strong Buy consensus rating. The shares are trading for $40.56 and have a $54.62 average price target, giving a one-year upside potential of ~35%. (See APA 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.
