- Oil prices have continued their weeks’-old downtrend
- Oil bulls remain optimistic about the short term fundamentals
- Juicy dividends and attractive valuations make energy stocks competitive
- Market Cap: $1.33B
- 12-Month Returns: 43.9%
- Market Cap: $46.62B
- 12-Month Returns: 167.75%
- Market Cap: $13.06B
- 12-Month Returns: 116.71%
The oil market is currently going through another rough patch as investors continue to grapple with inflationary, recessionary and demand fears. Oil prices have continued their weeks’-old downtrend after inflation came in higher than forecast and triggered a sharp sell-off on Wall Street.
The consumer price index (CPI) for the month of August increased 0.1%, above economists’ expectations for a 0.1% drop. Most worryingly for policymakers, core inflation rose by 0.6% for an annual increase of 6.3%, considerably higher than the 5.9% recorded for July. Core inflation strips out volatile items like energy and food.
While crude prices have taken a big hit, oil and gas stocks have fared even worse with energy equities experiencing nearly double the selling pressure compared to WTI crude.
A couple of weeks ago in a note to clients, MKM Chief Market Technician J.C. O'Hara expressed concern that “bears are coming after winners” in the energy sector, and they “may take energy down”.
"Normally we like to buy pullbacks within uptrends. Our concern at this point in the Bear market cycle is that leadership stocks are often the last domino to fall, and thus profit taking is the greater motivation. The fight-or-flight mentality currently favors flight, so we would rather downsize our positioning in Energy stocks and harvest some of the outsized gains achieved following the March 2020 COVID low,” he wrote.
But the bulls are standing their ground, perceiving the latest selloff as a temporary blip.
In a recent interview, Michael O’Brien, Head of Core Canadian Equities at TD Asset Management, told TD Wealth’s Kim Parlee that the oil supply/demand fundamentals remain rock solid thanks in large part to years of underinvestment both by private producers and NOCs.
For contrarian investors, here are some top 3 stocks to buy in the Oil Patch.
1. Tamarack Valley Energy
Headquartered in Calgary, Canada, Tamarack Valley Energy (TSX:TVE) is a small oil company that acquires, develops, and produces crude oil, natural gas, and natural gas liquids in the Western Canadian sedimentary basin.
Tamarack Energy primarily holds interests in Alberta Cardium light oil plays in Wilson Creek, Pembina, Alder Flats and Garrington and Lochend areas in Alberta. It also owns Viking light oil resource plays in Redwater in Alberta.
A few days ago, Tamarack announced that it will acquire Deltastream Energy in a $1.425 billion deal. Deltastream is a pure-play on Clearwater, a new shale oil play where development began only six years ago. The acquisition will add 23,000 barrels per day of oil equivalent to Tamarack’s production next year, according to the company.
"With this transaction, Tamarack will become the leading public Clearwater business, with an exceptional combined asset base,” Bill Slavin, Managing Director, ARC Financial, which owns 85% of Deltastream, has said.
Although Tamarack’s debt has surged after making several accretive acquisitions, it could come down by nearly 50% with the current high level energy prices.
2. Devon Energy
Early in the year, BofA Analyst Doug Leggate advised investors to focus on oil companies with potential to grow their free cash flows through consolidations or other cost reduction measures, naming Devon Energy (NYSE:DVN), Pioneer Natural Resources (NYSE:PXD), and EOG Resources (NYSE:EOG).
Devon fits that playbook to a tee.
DVN stock has been one of the best-performing energy stocks thanks to strong earnings and continuing cost discipline including a variable dividend structure.
Following the merger with WPX Energy (NYSE:WPX) last year, the company announced fixed-plus-variable dividends, something that has gone down well with Wall Street. In the second quarter, Devon paid out up to 50% of free cash as a variable dividend, bringing the total dividend to $1.55 per share. The stable portion has been indifferent, currently yielding slightly more than 1%. But if the latest convertible payout is a sign of the future, shareholders could receive closer to 10% overall.
Some Wall Street analysts had earlier pointed to the potential for DVN to sport a dividend yield of as high as 8% by year-end. Devon has already exceeded that, and now sports a juicy 9.7% estimated forward dividend yield.
3. APA Corp
Shares of APA Corporation (NASDAQ:APA) have been on an uptrend ever since after the company last December signed an agreement with the Egyptian government to invest at least $3.5B on research, development and production in the country's Western Desert.
According to APA’s management, the deal consolidates 90% of gross production into a single concession and also refreshes existing development lease terms for 20 years. Egypt's parliament has already approved an agreement to modernize and consolidate its production sharing contracts with the government.
Back in 2020, APA announced a major oil discovery at its 1.4-million-acre offshore Suriname tract adjacent to Exxon Mobil's (NYSE:XOM) historic discovery. APA said it has made a world-class discovery at the Kwaskwasi-1 well located in the prolific Guyana-Suriname Basin, where it encountered 278 meters (912 feet) of net oil and volatile oil / gas condensate pay.
Bank of America touted the Suriname prospect as a potential game-changer for APA:
“Suriname has the potential to reset the investment case,” Merrill Lynch’s veteran oil-industry analyst Doug Leggate said.
A few days ago, APA declared a $0.25/share quarterly dividend, good for a 100% increase from the prior dividend of $0.13. APA shares now sport a 2.4% Forward Yield. Devon Energy stock is currently flashing a buy signal after breaking a recent downtrend.