Oil and gas stocks had a big year in 2021. Rebounding demand and supply shortages drove both oil and gas prices to multi-year highs.
After huge gains in the past 12 months, one analyst said Monday that investors may need to be more selective with oil and gas stocks in 2022.
The Analyst: Bank of America analyst Doug Leggate issued the following downgrades on Monday:
- Devon Energy Corp DVN downgraded from Buy to Neutral, price target raised from $50 to $57.
- Pioneer Natural Resources Co PXD downgraded from Buy to Neutral, price target raised from $230 to $234.
- Marathon Oil Corporation MRO downgraded from Neutral to Underperform, price target raised from $18 to $19.
- Coterra Energy Inc CTRA downgraded from Neutral to Underperform, price target cut from $26 to $23
Related Link: 10 Best Performing S&P 500 Stocks Of 2021
The Thesis: In the note, Leggate said he remains bullish on the oil space in 2022.
“With improved performance we expect investor apathy conflated with ESG concerns to be replaced by a what we would regard as a more rational view on the value proposition of ‘old energy,’ against a realistic pace of any energy transition and anchored on transparent valuations defined by free cash flow and defended by outsize cash returns prioritized over growth,” Leggate said.
As the market takes a more rational approach to the transition to clean energy, Leggate said U.S. oil stocks have roughly 30% valuation upside as a group.
Leggate said oil prices should normalize once post-COVID-19 pandemic demand recovers and remain in the $60 to $80 per barrel range in the long term. A disciplined approach to capex in recent years has U.S. oil stocks positioned to return an unprecedented amount of cash to investors, Leggate said. He calculates an average sector FCF yield of 20% in 2022.
Leggate also named Occidental Petroleum Corporation OXY, Exxon Mobil Corp XOM, APA Corp (US) APA and Hess Corp. HES his top oil and gas stock picks for 2022.
Benzinga’s Take: It’s understandable why investors are excited about alternative energy stocks and their long-term growth potential. However, the Energy Information Administration projects renewables will still account for far less than half the global energy supply by 2050.
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