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From value specialists to momentum traders, there is a notable shift among newsletter advisors to boost their portfolio exposure to the oil and gas sector. With the caveat that this has been a highly volatile space, we offer a dozen energy sector stocks and ETF favorites from contributing advisors at MoneyShow.com.
Elliott Gue, Energy & Income Advisor
We remain cautious on near-term natural gas prices but constructive over the intermediate to long term. That’s why we’re starting with a small base position in Chesapeake (CHK) with the intention to recommend buying more if the stock were to dip somewhat from the current price.
In 2020, after years of depressed gas prices and poor financial performance, Chesapeake filed for bankruptcy and was delisted from NYSE. However, just a few months later in early 2021, CHK emerged from bankruptcy protection with a stronger balance sheet including just about $1.4 billion in net debt down from almost $10 billion at the end of 2019.
Today, the company produces gas from three main regions, the Eagle Ford play in Texas, the Haynesville in Louisiana and the Marcellus in Appalachia. And, CHK is now firmly focused on capital returns over growth. In 2022, the company is projecting total free cash flow of $1.9 to $2.1 billion with a total of as much as $9 billion projected over the next 5 years.
That’s a lot of cash, especially when you consider that the total value of all of CHK’s outstanding shares and debt is just $12.6 billion. Better still, management has plans to return much of this capital to shareholders via a combination of share buybacks and a generous base and variable dividend structure.
In March 2022 the company paid a $0.4375 per share base dividend and a $1.33 per share variable dividend for a total of $1.7675. And for the entirety of 2022, CHK expects to pay between $900 million and $1.1 billion in dividends, which annualizes to a yield of close to 10% in 2022.
Over the next 5 years, CHK plans to return approximately $5 billion as dividends, which means that an investor would receive almost 45% of their current investment in the stock in the form of dividends over just the next 5 years alone.
Jake Scott, Schaeffer Investment Research
Oil & gas name Antero Resources Corporation (AR) recently hit a nearly seven-year with support from its 20-day moving average coming into play in early February. The stock now boasts a 76.5% year-to-date lead and is up more than 200% in the last 12 months. Even better, there’s reason to believe AR could continue to climb higher in the coming weeks.
Specifically, this recent peak comes amid historically low implied volatility, which has been a bullish combination for Antero Resources stock before. According to our data there have been five other times in the past five years when the stock was trading within 2% of its 52-week high, while its Schaeffer’s Volatility Index (SVI) stood in the 20th percentile of its annual range or lower.
This is now the case — and our data shows that one month after these signals, the security was higher, averaging an impressive 14.2% return for that time period. From its current perch, a move of similar magnitude would put Antero Resources stock just over $35 per share, an area the equity has not crossed since June 2015.
A short squeeze could also keep the wind at AR’s back. Short interest rose 14.2% in the last two reporting periods, and the 25.59 million shares sold short now accounts for 9.3% of the security’s available float. An unwinding of pessimism in the options pits could send the shares higher still. The stock’s put/call open interest ratio sits in the elevated 97th percentile of its annual range. In other words, short-term options traders have rarely been more put-biased.
Matador Resources (MTDR) — one of our current favorite stocks — has outstanding operating momentum, contributing to its stellar Quadrix scores, based on proprietary quantitative ranking system. For the 12 months ended December, the energy company grew earnings per share 685% and revenue 117%.
Operating cash flow more than doubled, and free cash flow surged 201% to $305 million. The stock earns an Overall score of 99, and both sector scores are above 80. Four of the seven category scores rank among top 6% of the more than 4,200 stocks in our research universe.
With drilling operations in New Mexico, Texas, and Louisiana, Matador targets production increases of 21% in oil and 16% in natural gas this year. Improved drilling capabilities should help sustain production and profit growth. Matador has reduced drilling and completion costs to boost profitability.
Aided by higher energy prices, the consensus profit estimate for 2022 has risen 32% over the past three months to $8.43 per share, implying 99% growth. Revenue is expected to increase 51%. At less than seven times projected earnings, Matador looks genuinely cheap. The stock is a “Best Buy”.
Devon Energy (DVN) is a leading oil and gas producer in the U.S. with a premier multi-basin portfolio headlined by its world class acreage in the Delaware Basin portion of the Permian in western Texas and eastern New Mexico. This basin accounts for approximately 70% of Devon’s production with (in order of importance) the balance from the Anadarko, Williston, Eagle Ford and Powder River basins.
Aggregate average daily production is running at about 570,000 to 600,000 boe per day and expected to hold steady in 2022, while Devon focuses on free cash flow (enabling a generous variable dividend, debt retirement and share repurchases) rather than volume growth.
Devon is due to report on Q1 results on 5/3. The consensus calls for EPS to nearly quadruple to $1.63 on revenues of $3.5 billion. For the full year analysts envision a near doubling of EPS to $6.92 on revenue of $14.4 billion. This should result in a strong fixed plus variable dividend. Based on Q4, the dividend was set at $1.00 and with much higher energy prices in Q1 the next dividend payment will be stronger.
One solution to Europe’s gas woes is to fill the loss of natural gas supply coming from Russia with liquified natural gas (LNG) from the United States. And while Europe’s LNG import facilities need to be expanded, Europe’s need for natural gas is truly good news for some American companies, such as Cheniere Energy (LNG).
Cheniere, which began operations in 2016, is the largest producer of LNG in the United States and the second-largest LNG operator in the world. It sells its LNG in more than 40 countries (expected to be 60 countries within a few years) on five continents.
Wall Street — the home of short-term thinking — has had Cheniere Energy in its doghouse for many years. There were doubts that anyone wanted U.S. gas. Fast forward to 2022 and Cheniere’s business is booming. In its latest earnings conference call, the company said it expected to hit at least $7 billion in operating profits this year. And the company has enough cash flow to begin paying down its $30 billion debt load, as well as start a dividend.
Make no mistake: this is a growth business. The U.S. began LNG exports just five years ago. The Department of Energy predicts that it will soon have the largest peak export capacity of any nation in the world. Cheniere itself already has the capacity to export 45 million tons annually of LNG. And it’s adding more capacity — about 10 million more tons.
I believe Cheniere will have billions of dollars to deploy over the next few years. This can be used for expansion, debt reduction and more repurchases, as well as higher dividends. Finally, Cheniere Energy will be the biggest winner in this whole sad situation in Ukraine. The stock is a buy on any weakness.
Ben Reynolds, Sure Dividend’s Retirement Newsletter
Magellan Midstream Partners (MMP) is one of the largest master limited partnerships (MLPs) in the U.S. The partnership has the longest pipeline system of refined products, which is linked to nearly half of the total U.S. refining capacity. The sheer size of its pipeline system sets it apart from its peers as the partnership has a reach that the competition simply does not have.
Another advantage is that Magellan Midstream Partners operates a fee-based model, meaning that just 10% of its operating income is dependent on commodity prices. This enabled the company to withstand the severe declines in energy prices in 2014 and 2017. As such, Magellan Midstream Partners can produce solid performance even during recessions.
We feel that investors should value Magellan Midstream on its cash flow. We project that the partnership will produce cash flow per unit of $5.20 in 2022. With the MLP trading at $49, Magellan Midstream Partners has a price-to-cash-flow of 9.4. We assume a fair price-to-cash-flow ratio of 12. Multiple expansion could add 5% to total annual returns if the stock were to reach our valuation target by 2027.
Perhaps the most attractive feature of MLPs is their tendency to offer very high dividend yields. Currently, the yield is 8.5%, which is more than six times the average yield of the S&P 500 Index. This high yield combined with an expected 3% growth rate for cash flow per share and a mid-single- digit contribution from multiple expansion leads to a total annual return projection of 13.9% for Magellan Midstream Partners.
Mike Cintolo, Cabot Top Ten Trader
Oil prices have been sagging since their early-March spike — yet many leading energy stocks, like Marathon Oil (MRO) remain near or at new highs. What gives? It’s all about expectations. In its latest update in February, Marathon said that its free cash flow would be around $3 billion this year (nearly 16% of the current market cap) while the minimum shareholder returns would total $1.8 billion this year (9.4% of the current market cap)!
There’s a modest dividend (0.8%), but the main form of returns is from share buybacks so far, and they’re coming fast and furious — from October through mid-February, the firm bought back 8% of its outstanding shares. Management sees this as a multi-year opportunity, with free cash flow averaging $2.3 billion a year through 2026 even at $70 oil and $3.50 natural gas.
To be fair, the firm still has a swath of debt ($4 billion), so it’s retaining some of that cash flow to pay off maturities as they come, but there’s little doubt Marathon is going to be paying out boatloads of cash and buying back stock for a long time to come. Q1 earnings are due May 5. We’re OK starting a position here, though as with most names, we prefer to get in on dips.
Occidental Petroleum (OXY) wasn’t a real leader of the oil rally last year, but solid execution, a bullish environment, massive cash flow and news that Berkshire Hathaway (BRK.B) has bitten off a big chunk of stock (it now owns nearly 15% of shares) has goosed the stock.
The reason for the underperformance was that the firm completed a whopping $10 billion divestiture program late last year, leaving it with core operations in the Permian, Rockies and Gulf of Mexico. The firm is still solidly in debt reduction mode but the underlying cash flow profile is so bullish that it’s a matter of time before big payouts and share buybacks arrive.
Indeed, in Q4 alone, the firm cranked out $2.9 billion of free cash flow (5% of the current market cap) and reduced debt by $2.2 billion, and still had $2.8 billion in cash sitting around; that left it with $27 billion in net debt, but that likely dipped below $25 billion in Q1 and should hit the target of $20 billion sooner rather than later.
For now, the payouts are small (the dividend was increased in Q1, but the annual yield is just under 1%), but investors see the huge cash flow likely leading to big things later this year or in 2023. There are a few moving parts here, but there’s little doubt that Occidental’s underlying business is extremely strong.
Marty Fridson, Forbes/Fridson Income Securities Investor
First Trust New Opportunities MLP & Energy Fund (FPL) seeks is to provide investors with a high level of total return, through an emphasis on current distributions. The fund’s strategy is to invest in a portfolio of income-generating securities, with a focus on publicly traded master limited partnerships (MLPs) and MLP-related entities in the energy sector and energy utilities industries.
Under normal market conditions, the fund will invest up to 85% of its managed assets in both equity and debt securities of MLPs and other energy sector and energy utility companies.
As of 02/28/22, the portfolio’s top holdings at the same date were Enterprise Products Partners, LP (EPD) at 13.4%; Magellan Midstream Partners, LP (MMP), at 8.7%; Cheniere Energy Partners, LP (LNG), at 6.4%; and Energy Transfer, LP (ET), at 6.0%.
The fund posted a strong market price total return of +39.29% for the full-year 2021 period, on the back of rebounding energy prices. Distributions are taxed on a variable basis, with FPL issuing a 1099 to investors. This investment is suitable for medium- to high-risk portfolios. Buy at $8.25 or lower for a 5.53% annualized yield.
Nate Pile, Little River Investment Guide
VOC Energy Trust (VOC) is a publicly traded trust that makes its money by holding what are known as “net profit interests” in properties associated with the production of oil and natural gas in the states of Kansas and Texas.
Essentially, in exchange for the investments the trust has made, it is entitled to receive a share of whatever profits may be generated through the operations taking place on the properties it is involved with and/or through the sale of the properties themselves.
To be sure, this is a situation that we will only stay in place while the trends that we currently see remain intact. But, at least for now, I like this company is positioned, and I encourage you to follow my lead in striking while the iron is hot.
The First Trust Natural Gas ETF (FCG) is the first exchange-traded fund of its kind, giving a dedicated exposure to the U.S. natural gas market. The fund tracks U.S. companies that derive a substantial portion of their revenue from the exploration & production of natural gas. Fortunately, the fund does a sufficient job of capturing the concentrated space.
First Trust Natural Gas selects from companies that are involved in natural gas in some capacity, dedicating 15% of its portfolio to master limited partnerships (MLPs) and the remaining 85% to equities. It then applies linear cap-weighted rankings to each bucket.
The index is designed to track the performance of mid- and large-cap companies that derive a substantial portion of their revenues from midstream activities and/or the exploration and production of natural gas. All eligible operating companies and MLP stocks are ranked on both liquidity and market cap within their segments.
FCG has $701.2 million in assets under management, and it has an average spread of 0.5%. The fund’s expense ratio is 0.60%. Average daily trading volume and market cap are factored in both selection and weighting. The resulting portfolio is a near-perfect representation of the market. The index is rebalanced and reconstituted on a quarterly basis.
Rida Morwa, High Dividend Opportunities
BlackRock Energy and Resources Trust (BGR) is a closed-end fund that provides immediate diversification in the energy space. Its holdings include some of the largest names in oil and gas such as Exxon Mobil (XOM), BP (BP), Chevron (CVX), Total (TTE), and ConocoPhillips (COP), among others.
BGR is currently trading at an 11% discount to NAV, providing an opportunity to gain exposure to these companies at a discount. BGR recently hiked its dividend by 17% to $0.044/month and there is potential for more dividend hikes ahead. BGR’s NAV has fully recovered from the COVID collapse.
Many of the fund’s holdings are likely to start hiking dividends more aggressively with oil prices being high, which will improve cash flow to BGR. Over the coming year, we can expect BGR’s NAV to continue rising, its dividend to be raised and it is likely that the discount to NAV will diminish as well. This all adds up to a CEF that is an attractive “dividend growth” option with exposure to a sector we expect to remain very strong throughout the year.
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