Oil prices are a hot topic for investors this September, after OPEC+ members Russia and Saudi Arabia unexpectedly extended voluntary production cuts through the end of 2023. WTI crude futures for October delivery (CLV23) have rallied more than 8% month-to-date, and closed Friday above the $90 level - the contract's highest price since November 2022.
In fact, consumer inflation posted its biggest monthly rise of 2023 in August, driven largely by an uptick in prices at the pump. And with the Energy Information Administration (EIA) predicting oil demand will outstrip supply well into next year, energy prices could remain at elevated levels for the foreseeable future.
Against this backdrop of surging commodity prices, investors can benefit by deploying their capital into high-performing energy stocks that look fundamentally strong and offer above-average returns. Here's a look at three oil and gas stocks set to climb alongside energy prices.
Diamondback Energy
Founded in 2007, Diamondback Energy (FANG) is one of the largest independent oil and natural gas companies in the United States. The company is engaged in the acquisition, development, exploration, and exploitation of unconventional, onshore oil and natural gas reserves, primarily in the Permian Basin. With a current market cap of $27.85 billion, Diamondback also offers shareholders a healthy dividend yield of 4.42%.
Diamondback Energy stock is up 17.6% on a YTD basis, comfortably outperforming the 7.2% gain in the Energy Select Sector SPDR Fund (XLE) in 2023.
Like many other energy companies, Diamondback's results for the second quarter were mixed, as softer commodity prices during the first half of the year pressured results. The company reported revenues of $1.92 billion for the quarter ended June 30, down 30.7% from the prior year. Meanwhile, EPS slipped by almost 48% from the previous year to $3.68, and missed the consensus estimate.
Encouragingly, the company's production activities remained strong, with growth reported in the key segments of oil, natural gas, and natural gas liquids. In fact, daily oil volumes rose 19% to 263,143 barrels per day.
More recently, Diamondback strengthened its water infrastructure in the Midland Basin by forming a joint venture with Five Point Energy. The joint venture has created the largest independent water infrastructure platform in the Midland Basin with 800 miles of pipelines for gathering, transport, disposal, and reuse. FANG popped 2.5% in one session on news of the partnership.
Analysts remain bullish about Diamondback stock, with a consensus “Strong Buy” rating and a mean target price of $173.39 - indicating upside potential of about 11.3% from current levels. Out of 22 analysts covering the stock, 19 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 1 has a “Hold” rating, and 1 has a “Moderate Sell” rating.
Callon Petroleum Company
We continue our list of energy companies with another name focused on the Permian Basin, Callon Petroleum Company (CPE). Callon Petroleum was founded 25 years ago and is focused on the acquisition, exploration, and sustainable development of high-quality petroleum assets in the Permian Basin. The company is a smaller player, with a market cap of $2.63 billion, and does not pay any regular dividends.
Shares of Callon Petroleum have risen more than 8% in the past month, compared to a gain of about 5% for the XLE in this time frame.
In its latest earnings report, Callon managed to surpass the consensus estimate for the first time in the last five quarters. Operating revenues for the quarter came in at a stronger-than-forecast $562.3 million, down 38.5% from the prior year. Adjusted EPS declined by 36% from the year-ago period to $1.99, but came in above the consensus estimate of $1.79.
Production of oil, natural gas, and natural gas liquids all increased year-over-year. Notably, the company produced 9,732 thousand barrels of oil equivalent in Q2 2023, up 6.2% from the prior year.
Although the company reported a decline in free cash flow (which was the case for most energy companies in the most recent quarter), Callon's net debt levels have remained almost unchanged from the beginning of the year.
Callon remains laser-focused on the Permian Basin, judging by two recent transactions. On July 5, Callon Petroleum announced that it had acquired the Delaware Basin assets of Percussion Petroleum Operating II, LLC and completed the sale of its Eagle Ford assets to Ridgemar Energy Operating, LLC. The Eagle Ford asset sale resulted in a $400 million impairment charge, reflected in the Q2 results. Going forward, Callon said the transactions will aid in eventual net debt reduction, and allow for the initiation of a $300 million share buyback plan.
Overall, analysts remain cautiously optimistic about the stock, with an average “Moderate Buy” rating. The mean target price is $51.07, which indicates an upside potential of about 32.4% from current levels. Out of 11 analysts covering the stock, 5 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 5 have a “Hold” rating.
Suncor Energy
We round out this list with Canadian integrated energy company Suncor Energy (SU). Founded in 1919, when it was known as the Imperial Oil Company of Canada, Suncor is one of the largest energy companies in Canada. It's primarily focused on the production of synthetic crude from oil sands, along with refining and marketing activities.
Suncor, which currently commands a market cap of $45.65 billion, is majority owner and operator of the world's largest oil sands mine - Syncrude, in Alberta - which has massive reserves expected to last for several decades to come. Currently, SU offers shareholders a solid dividend yield of 4.38%.
Suncor Energy stock is up 14.6% in 2023 so far, easily outpacing the broader XLE.
The second-quarter energy industry trend of lower earnings and higher production also extended to Suncor. The company reported EPS of $1.44, down 49.3% from the prior year. However, total upstream production increased by 3% to 741.9 million barrels of oil equivalent per day. Refinery utilization also improved, rising to 85% from 84% in the year-ago period.
Just like its peers mentioned above, Suncor reported a slowdown in cash generated from operating activities during the recently concluded quarter. Nevertheless, it managed to reduce net debt to about $14.4 billion from $15.7 billion last year.
Analysts like the outlook for SU, judging by the consensus “Moderate Buy” rating and mean target price of $39.12. This indicates expected upside potential of about 11.5% from current levels. Out of 12 analysts covering the stock, 6 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 4 have a “Hold” rating.
Final Takeaway
With oil prices on the rise, one of the best ways for investors to leverage the action in their favor is through the selection of high-quality energy stocks with strong operational execution.
All three of our focus stocks are performing well on the charts, firing on all cylinders in terms of production, and have healthy cash reserves alongside manageable debt levels. Plus, they're focused on returning cash to shareholders, whether via dividends or buybacks. Given the strong tailwind of rising crude prices, combined with optimistic forecasts from analysts, these energy standouts look like compelling investments right now.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
