TipRanks' Top Picks for 2024

[dan_s]

This is a note from TipRanks that I received on January 16 (yesterday) after the markets closed. These are all large-caps that I have followed closely for decades. FANG is in our High Yield Income Portfolio and OVV is in our Sweet 16. OXY is a former Sweet 16 company, that draws a lot of attention because Warren Buffet has a large stake in the company. My comments are in blue.
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The deep cold and heavy blizzards that have hit much of the country this past week caused a spike in natural gas prices on the commodity trading floors, highlighting the natural volatility of the energy markets. This volatility is expected to remain an important factor for oil and gas stocks in the coming months, even as the energy industry as a whole benefits from sector-level tailwinds.

This is the thesis presented in a recent note from TD Cowen, which assesses the exploration and production (E&P) stocks in the sector for the upcoming year.

“2024 may prove to be a pivotal year as several external forces such as geopolitical risks and macroeconomic factors could play a part in the story of oil, though near-term we see domestic shale players high grading portfolios and returning to maintenance production programs in an attempt to sustain capital efficiency,” opined TD Cowen’s E&P team.

Against this backdrop, the TD Cowen analysts have followed up by selecting several energy stocks for investors to monitor as the 4Q23 earnings season unfolds. Let’s explore what sets these names apart from the rest of the pack. With some assistance from the TipRanks database, we can also see what the rest of the Street currently thinks about these names. These are all companies with strong balance sheets, have lots of running room and they generate a lot of free cash flow.

Diamondback Energy (FANG)

We’ll start with a company that boasts one of the coolest tickers on the NASDAQ, Diamondback Energy. This large-cap, independent E&P firm is based in Midland, Texas, and works the Texas oil fields – the company’s activities focus on the ‘acquisition, development, exploration and exploitation’ of various oil and natural gas assets in famous Permian Basin located in West Texas. Diamondback specializes in working unconventional onshore assets, working through horizontal drilling and tapping multiple intervals in its targeted hydrocarbon formations.

The Permian formation is the largest oil-producing region in the US, and in the last decade or so it put Texas back on the world’s map of high-production energy powerhouses. The region owes its resurgence to the technologies that Diamondback works with – horizontal drilling and hydraulic fracturing, which allow E&P companies to unlock known oil and gas reserves that had previously been thought unreachable. The area is a rich environment for the energy industry, and is estimated to contain up to 100 billion barrels of technically recoverable crude oil, along with 229 trillion cubic feet of natural gas.

As for Diamondback’s position, the company finished 2022, the most recent full-year with available data, with proved reserves of 2,033 Mmboe (million barrels of oil equivalent). Of this total, 53% was recoverable crude oil. The company’s average production through the year 2022 came to 386 Mboe/d (thousand barrels per day). < Q4 2024 production should be ~458,000 Boepd (59% crude oil).

For return-minded investors, Diamondback pays out a regular dividend, and in the last two years has supplemented the regular payment with a variable dividend. In the last declaration, made in November 2023, the company set the regular payment at 84 cents per common share and the variable at $2.53 per share; these were paid out on November 24. The regular dividend gives a yield of 2.2%, while the combined regular+variable payment yields nearly 8.8%. < This is why I moved FANG to our High Yield Income Portfolio. It is now a mature "Growth + Income" stock.

When we look at Diamondback’s last quarterly release, from 3Q23, we find that the company’s average daily production was up to 452.8 Mboe/d. The company generated $2.34 billion in total revenue for the quarter, a total that was down by $100 million year-over-year but beat the forecast by over $140 million. The firm’s bottom line, the adjusted net income, came to $990 million; this gave an adj. EPS of $5.49, beating the forecast by 50 cents per share.

Turning to the Cowen outlook, we check in with analyst David Deckelbaum, who is bullish on Diamondback, describing the company as productive and disciplined: “As the curtain of consolidation casts itself over Permian operators, FANG emerges as a continued beneficiary of scarcity value outperforming a majority of public peers. We maintain our view that FANG is one of the best plays within the broader Permian basin moving into FY24 and anticipate the name easily maintaining robust production volumes while displaying significant capital discipline.”

Deckelbaum goes on to rate this stock as Outperform (Buy), with a price target of $177 to suggest a one-year upside potential of 15%. (To watch Deckelbaum’s track record, click here) < My current valuation is $184. My "Dream Merger" is FANG + PR.

The Strong Buy consensus rating on this stock is based on 18 recent analyst reviews, that break down to 16 Buys, 1 Hold, and 1 Sell. The shares are priced at $153.84 and have an average price target of $183.11, implying a gain of 19% for the coming year.

Ovintiv (OVV)

The second Cowen pick we’ll look at is Ovintiv, a company with a $11.3 billion market cap. This firm works in the North American E&P segment, on a ‘multi-basin’ approach – rather than focus on one high-output region, Ovintiv has staked positions in several world-class production basins on the North American continent. These include Permian and Anadarko basin formations of Texas and Oklahoma, and the Montney formation on the border between the Canadian provinces of Alberta and British Columbia.

Ovintiv’s approach has brought the company success, and at the end of 2022 the firm had solid reserves, counting both oil and natural gas, of 2.3 billion barrels of oil equivalent. This figure included 50% liquids, and of the total, 57% was classed as ‘proved developed,’ meaning the company is already tapping into it. Based on Ovintiv’s proven reserves, the company had a reserve life index at the end of 2022 of 12.2 years.

We’re getting toward the end of 2023, and Ovintiv is expected to release last year’s numbers during February. In the meantime, we can look at the 3Q23 data to get an idea of where the firm stands.

The company’s production total came to 572 Mboe/d, which broke down to 214,000 barrels of oil per day; 87,000 barrels of natural gas liquids; and 1,625 billion cubic feet of natural gas. The company raised its production forecast for 2023 to the range of 550,000 to 560,000 barrels of oil equivalent per day. While the company’s production was good, it brought the company below-expected earnings. Ovintiv’s bottom line print came to $1.47 per share, in GAAP measures, 27 cents per share below the forecast. < Q4 2024 production should be ~575,000 Boepd, with growth to 595,000 Boepd by the end of 2024.

Nevertheless, Cowen’s Gabe Daoud sees Ovintiv in position to maintain performance in 2024 after a strong finish for 2023. He writes of the company, “With the upcoming print, the ’24 guide will capture the most interest given investor expectations of an improved outlook (200kbd in oil + condensate likely raised with capex likely tightened to $2.3b at the midpoint). We expect OVV to end ’23 strong as we see oil + condensate at 226kbd, towards the high end of 4Q guidance on the back of 51 Permian TILs, ~16 in the Montney, 11 in the Uinta, and 4.4 in the Anadarko. A stepdown in production is expected in 1Q24 given the acceleration in 2H23 TILs keeping the company on track for an earlier landing to ~200kbd by 2Q24. We again note, however, that the 200kbd steady state level is likely biased higher owing to Permian productivity gains. All-in we model 208 kbd for FY24, though clearer messaging around the ‘above 200 kbd’ is expected with this print.”

These comments support Daoud’s Outperform (Buy) rating on OVV, while his price target, now set at $55, points toward a one-year gain of 32% for the shares. < My current valuation of OVV is $65/share, which is just 4X annualized operating CFPS for 2023 to 2025.

Once again, we are looking at a stock with a Strong Buy consensus rating. OVV shares have 11 recent reviews, including 9 to Buy against 2 to Hold. The shares’ average price target of $56.45 implies a one-year potential upside of 36% from the current $41.58 trading price.

Occidental Petroleum (OXY)

Wrapping up our list, we’ll look at Occidental Petroleum, a $50 billion player in the American oil industry. Occidental has major holdings in the US, in the Middle East, and in North Africa; the company’s US E&P activities include work in the Permian and DJ basins of Texas and Colorado, as well as offshore in the Gulf of Mexico. The company finished 2022 with 3.8 billion barrels of oil equivalent in proved reserves, for a y/y increase of 8.5%.

This company has had some unfortunate news exposure recently, as its Gulf of Mexico production activities were forced to shut down after an oil spill. According to news reports at the time, a subsea pipeline ruptured, causing large quantities of oil to leak into the surrounding waters. Occidental and several other companies use this pipeline to move crude oil to shore; the loss impacts approximately 15% of Occidental’s total American production volume.

That volume remains substantial, however. As of the end of 3Q23, Occidental’s 2023 year-to-date total production volume from American sources, for both oil and gas, came to 1,000 Mboe/d. The company had an additional 219 Mboe/d in international production.

On a positive note, Occidental in December announced that it will be purchasing CrownRock, a Midland, Texas-based oil and gas producer. The acquisition will provide a strong addition to Occidental’s onshore portfolio, particularly in the Midland Basin. The company expects to see 170 Mboe/d in additional production in 2024 from this acquisition.

Occidental’s last quarterly release was for 3Q23, and the company showed a total of $7.4 billion in quarterly revenue. While down 22% y/y, this revenue figure beat the forecast by $440 million. The company’s bottom line came to $1.18 per diluted share by non-GAAP measures, or 32 cents per share better than had been expected.

Checking in again with Cowen’s Deckelbaum, we find the analyst upbeat on Occidental’s ability to recover from the Gulf spill, saying of the firm’s prospects, “In spite of a production halt in the GOM since mid-November, we believe OXY will clip the low end of its total production guidance range to 1,206 MBOED. Our model suggests that based on cumulative productivity improvements ~9% in the Delaware OXY will produce near the high end of their 571 to 591 MBOED Permian production guidance at 589 MBOED despite weather delays in early October.”

Deckelbaum goes on to explain how this stock will generate returns for investors, adding to his comments above, “Even with higher opex, we still see OXY generating over $1bn in pre-dividend FCF. During 3Q reporting, OXY alluded to leaning off the throttle of preferred redemptions until 1H24. We would expect OXY to continue their $0.18/share base dividend and continue to repurchase shares as they had already completed ~60% of their second $3bn buyback authorization by 3Q.”

At the bottom line, the analyst gives OXY shares an Outperform (Buy) rating, with a $70 price target implying an upside potential of 20.5% in the next 12 months.

Overall, Occidental’s 17 recent reviews, with 7 Buys to 10 Holds, give the shares a Moderate Buy consensus rating. The stock is trading for $58.06 and its $69.13 average price target suggests a gain of 19% on the one-year horizon.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

[marc.wolin@yahoo.com]

Top picks

I see these are larger quality companies. No mention was made of the small insider oil companies with no leverage that we stand to facilitate their deal and take a low premium for in return. Where are they? I never have understood the motivation here?

Marc Wolin