We’re nearing the tail end of the year, and it’s time to start deciding how to allocate the portfolio for a solid year-end return. In a recent note from JPMorgan, focused on the energy sector, 5-star analyst Arun Jayaram suggested that oil and gas producers are likely to outperform overall markets going forward.
Moving quickly to the bottom line, Jayaram says, “We remain a fan of the long-term natural gas story driven by growing global demand for low-cost US gas exports.”
With this in mind, we took a closer look at two energy stocks that got the thumbs up from the JPM expert. In fact, Jayaram is not the only one singing the praises of this stock. According to the TipRanks platform, the rest of the analyst community rates them as Strong Buys.
Permian Resources (PR)
First up is Permian Resources, a Texas-based E&P operating in the Delaware Basin. Permian was formed this year through the identical merger transaction between Centennial Resource Development and Colgate Energy. Permian Resources emerged from that merger as the largest pure E&P firm operating in Delaware. Permian productive assets include 180,000 net lease acres and 40,000 royalty acres; these holdings generated 137,000 barrels of oil equivalent per day, split equally between oil and gas products.
Permian Resources’ assets are highly valued, and the company’s production translated into high revenue and earnings in the recently reported 2Q22. The top line was $472.7 million, more than doubling year-over-year from $232.6 million. Earnings, reported at $193.1 million, generated diluted EPS of 60 cents. This was a strong turnaround from 2Q21, which saw a 9-cent quarterly EPS loss.
This company is currently operating an 8-rig drilling program, but has a detailed 2023 development plan that specifies starting with 7 active rigs. Permian’s plans include improving its operating efficiencies, and the company is targeting $1.1 billion to $1.3 billion in free cash flow for the full year 2023.
Jayaram, in his JPM report, highlights 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 returns paired with differentiated volume growth as they trade spell below. peers on 2023 DACF and at a premium on FCF metrics. PR established a base annual dividend of $0.20 per share and will return at least 50% of post-dividend FCF to shareholders beginning in 2Q22.”
“PR is also in the top quartile of our updated JPM Performance Ranger, which places the heaviest weight on cash return and FCF generation, which we consider the most important metrics for investors. We estimate PR to return 10% of the market.cap shareholders in 2023 while also delivering 10% oil volume growth,” Jayaram added.
Quantifying his position, Jayaram gives PR an Overweight (ie Buy) rating, with a $12 price target implying ~56% upside for the next 12 months. (To view Jayaram’s track record, Click here)
Overall, Permian receives a Strong Buy consensus rating from the Street, based on 8 analyst reviews that include 7 Buys over 1 Hold. The shares are selling at $7.66, and their average price target of $10.86 suggests a 35% one-year upside. (See PR stock forecast on 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 cap of more than $71 billion, and operates in some of the continent’s richest oil and gas regions. EOG has production activities in Texas, Louisiana, Oklahoma, and New Mexico, in major fields such as Eagle Ford, Permian, Anadarko, and Barnett. The company also has operations in Colorado’s DJ Basin, Wyoming’s Powder Basin, and the Williston Basin on the border between North Dakota and Montana. EOG even operates in the Caribbean, with activities in the Columbus Basin offshore near the island of Trinidad.
All of this pushed EOG’s revenue to record levels. The company reported a total of $7.4 billion at the top line in 2Q22, the most recently reported, after quarterly production of 920.7 MBoed. Adjusted net income came in at $1.6 billion for the second quarter, with adjusted EPS of $2.74. On the balance sheet, EOG reported just over $5 billion in total debt, and about $3 billion in cash and liquid assets.
EOG has seen 8 quarters of sequential revenue growth. Earnings were more volatile, but Q2 EPS was up 58% y/y.
Summing up EOG for investors, Jayaram wrote: “We continue to view EOG as a key long-term holding in the space due to its premium drilling strategy poised to support differentiated returns on capital assuming mid-cycle pricing or better. One of the key themes is the differentiated performance of E&Ps that are accelerating cash returns for equity holders. Equity holders were rewarded with a greater return on cash than debt reduction, which favors companies with strong balance sheets such as EOG.”
The JPM analyst gives EOG an Overweight (ie Buy) rating, and his price target, which he set at $156, indicates confidence in a 28% bottom line in the coming year. (To view Jayaram’s track record, Click here)
Wall Street clearly agrees with Jayaram that this stock is a Buy proposition – the 14 analyst reviews on file include 12 Buys and 2 Holds. The shares are trading at $121.42, and the average price of $150.29 implies ~24% upside going forward. (See EOG stock forecast on TipRanks)
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Denial: The views expressed in this article are solely those of the analysts in question. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.