The economic downturn in 2020 has been particularly hard on oil and gas stocks. However, Bank of America analyst Asit Sen believes energy earnings have troughed for this cycle and are now on the upswing.
Bank of America is projecting volumes and EBITDA margins will improve in coming quarters, and selective traders have plenty of buying opportunities in the space.
“We believe the 2H20 outlook is ‘less bad’ following a very tough 1H20 and we are close to a cyclical bottom,” Sen wrote in a Thursday note.
Looking ahead to 2022, Sen is projecting a normalization of global oil stockpiles and a recovery in global demand that exceeds supply.
Clean Energy Transition: Sen supports the idea of a global transition to clean energy, but he isn't anticipating that transition will have a meaningful impact on global oil demand for at least another decade. Meanwhile, he said investors don’t seem to fully appreciate the impact that upstream underinvestment will have on oil supply.
The first half of 2020 was brutal for North American exploration and production companies, but Sen said the tough environment has forced companies to focus on three main goals: shoring up their balance sheets, eliminating capex growth and providing investors visibility related to dividends and free cash flows.
Looking ahead, Sen said investors should closely monitor cash margins, reinvestment ratios and free cash flow in coming quarters. His preferred stock picks have sustained capex and provided cash flow and dividend visibility for investors.
How To Play It: Here are Bank of America’s top 10 US oil & gas shale stocks to buy:
- Diamondback Energy Inc FANG
- Parsley Energy Inc PE
- WPX Energy Inc WPX
- Ovintiv Inc OVV
- National Fuel Gas Co. NFG
- Suncor Energy Inc. SU
- Canadian Natural Resources Ltd CNQ
- Enbridge Inc ENB
- TC PIPELINES LP Common Stock TRP
- Brookfield Infrastructure Partners L.P. BIP
Benzinga’s Take: Few investors would argue that the world will still be relying primarily on fossil fuels in 2120. However, oil and gas still account for 69% of U.S. energy consumption, and industry insiders don’t see peak global oil production happening until at least 2030.
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