Since the stock market bottomed in March of last year, energy stocks have experienced a strong rebound. Of course, the biggest factor has been the sharp turnaround in oil and natural gas prices. This is largely due to demand returning to pre-coronavirus levels, while supply remains constrained.
As a result, energy stocks have also posted massive earnings beats on a year-over-year basis. Many energy stocks are cheaper than they were a year ago because their earnings have outpaced gains in their equity prices. And, this has become even more pronounced in recent weeks with the sell-off in energy stocks on concerns about growth slipping due to the outbreak in coronavirus cases with the Delta variant.
However, there are some compelling reasons to treat this dip as a buying opportunity. For one, CAPEX in the energy sector remains quite low despite the rebound in price. Additionally, demand for oil and natural gas has proven to be quite resilient over the past year despite the shutdowns and decrease in economic activity. Therefore, investors should look to add the following energy stocks: Oasis Petroleum (OAS), Apache Corporation (APA), and Continental Resources (CLR).
Oasis Petroleum (OAS)
OAS is an independent exploration and production company with long-lived assets in the Williston and Delaware Basins. The company is focused on the acquisition and development of onshore unconventional oil and natural gas resources. It operates through three segments: Exploration and Production, Well Services, and Midstream Services.
As energy prices have rebounded, we see a similar turnaround in OAS’ EPS estimates for 2021 and 2022. 2021 EPS has risen from $4 a share to $15 a share, while 2022 EPS estimates are up to $19 a share from a low of $5 a share. To compare, OAS’ 2020 EPS was $1.56 per share, and analysts have issued estimates between $12 and $16 per share for 2021.
First of all, it shows that OAS is a high-quality operator as it was able to remain profitable in 2020 despite a historically atrocious year for energy producers. And, it exemplifies the phenomenon of stock price gains in energy companies’ lagging earnings growth. Another aspect to like about OAS is that it recently became public in November 2020. This means that it has lower debt financing costs than the majority of its peers as these tend to be renegotiated during the process.
These positives were evident in its last earnings report as the company topped earnings expectations by a significant margin at $2.76 vs expectations of $2.29. It was also a more than ten-fold improvement over last year’s Q2 profit of $0.23 per share. Revenue also exceeded estimates by a significant margin, coming in at $393 million vs $271 million.
The POWR Ratings are quite bullish on the stock as it has a B rating which equates to a Buy. B-rated stocks have posted an average annual performance of 19% which compares favorably to the S&P 500’s annual performance of 7%. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. To see more of OAS’ POWR Ratings, click here.
Apache Corporation (APA)
APA is one of the largest explorers and producers of oil and natural gas in the US. The company operates through its subsidiaries: Apache Corporation and APA Corporation Suriname and is based in Houston, Tex. In the last quarter, the company produced 395,000 barrels of oil (or oil equivalent) per day.
Even more impressive, it was able to generate $400 million in free cash flow during the quarter. This makes the company quite attractive as it is trading at a single-digit multiple in terms of its free cash flow which is quite rare. Even by more traditional valuation metrics, the company stands out as it has a forward P/E of 6.9.
Essentially, the market is treating APA’s earnings surge as “transitory”. However, I believe that oil prices are likely to remain firm and have a good chance to keep trending higher. Recently, prices have softened due to concerns about the outbreak in coronavirus cases due to the Delta Variant. Yet, it’s unlikely that economies will shut down, and even during the worst of the crisis, demand was more resilient than expected.
Further, the supply side remains constrained. This is evident as Capex spending for the entire sector has been depressed and is close to 2002 levels when oil prices were much lower. Producers are more disciplined which is evident with the recent OPEC meeting, and many companies choosing to pay off debt rather than increase production.
Given these positives, it’s not surprising that APA is rated an A which equates to a Strong Buy. On top of that, it has As and Bs in for most component grades including Growth, Value, Momentum, Sentiment, and Quality. To see more of APA’s POWR Ratings, click here.
Continental Resources (CLR)
CLR is a crude oil and natural gas company with properties all over the United States. The company is also the largest leaseholder and one of the largest producers in the nation’s premier oil field - the Bakken of North Dakota and Montana.
CLR is also a company that is seeing extraordinary gains in terms of its share price with a 100% gain over the past year. And, it looks quite modest compared to its turnaround in terms of earnings. Over the past 12 months, the company lost $1.17 per share, while it’s projected to earn $3.23 per share in 2021.
CLR has a forward P/E of 12.9. This is substantially cheaper than the S&P 500’s forward P/E of 22. In addition to its cheap valuation, it pays an attractive dividend of 1.2%. On top of this, the company has topped earnings and revenue estimates for 3 straight quarters. Wall Street analysts are bullish on the stock as it has a consensus price target of $40, implying more than 10% upside.
CLR’s revenue is expected to increase 78.5% year-over-year to $4.62 billion in fiscal 2021. Its EPS is expected to come in at $0.67 for Q3.
It’s no surprise that CLR has an overall B rating, which equates to a Buy in our POWR Ratings system. Also, the stock has an A grade for Momentum and Quality, and a B grade for Growth and Sentiment. Click here to see more information about CLR.
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CLR shares rose $0.18 (+0.48%) in after-hours trading Wednesday. Year-to-date, CLR has gained 130.06%, versus a 19.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles.3 Very Cheap Energy Stocks to Buy on the Dip appeared first on StockNews.com