Oil prices are soaring in the new year, thanks to a tightening supply, geopolitical tensions between Russia and Ukraine, and concerns about inflation.
According to a Reuters report, oil prices are up 10% so far this year, with the Organization of the Petroleum Exporting Countries (OPEC) struggling to hit its target of a rise in output of 400,000 barrels each day.
The report quoted ConocoPhillips’ CEO, Ryan Lance, who said that he remained bullish regarding the oil market as he expects oil prices to continue their upward trajectory this year. Indeed, many analysts are also expecting oil prices to either hit the $100 mark or surpass it this year.
Against this background, how are oil exploration and production (E&P) companies expected to fare this year? Let us compare two such oil stocks, ConocoPhillips and Chevron, using the TipRanks stock comparison tool, and look at what Wall Street analysts are saying about these stocks.
ConocoPhillips (NYSE: COP)
ConocoPhillips, headquartered in Houston, Texas, is an oil E & P (exploration and production) company that has operations in 14 countries. The company has a global and diverse asset base worth $87 billion in North America, Europe, and Asia.
Late last year, the company announced two deals that focused on the Asia-Pacific segment of its diverse global portfolio. This included the sale of its assets in Indonesia and the exercise of its pre-emptive right to buy an additional 10% shareholding interest in Australia Pacific LNG (APLNG) from Origin Energy for $1.645 billion.
The company also unveiled its capex plans and a three-tier capital return program in December last year. This program gave more color regarding ConocoPhillips plans and outlook for this year. The company is expected to announce its Q4 results on February 3.
This year, COP plans to spend approximately $7.2 billion in terms of capital expenditure. It is important here to note that capex is an important measure for capital-intensive industries like oil and gas and helps in gauging the company’s future growth prospects.
When it comes to oil production, ConocoPhillips anticipates annual average production of around 1.8 million barrels of oil equivalent per day (MMBOED) – a percentage growth in the low single-digits versus 2021.
What’s more, the company expects to return around $7 billion of capital to shareholders this year, an increase of 16% compared to last year. This would be based on the initiation of a three-tier capital return program.
This program will consist of “a compelling ordinary dividend tier, a share repurchase tier, and a newly authorized quarterly variable return of cash (VROC) tier.” The company has paid the first VROC of $0.20 per share on January 14 to shareholders of record as of January 3.
RBC Capital analyst Scott Hanold highly approved of this capital return program and thinks that the management has “one of the clearest and most defined investment propositions.”
Elaborating on it further, the analyst pointed out that COP’s priorities include sustaining its oil production, paying out dividends, growing its dividends annually, and maintaining a strong balance sheet.
Another positive for the stock, according to Hanold, is that the company is aiming to pay out 30% or more of its operating cash flows (CFO) to shareholders, while at the same time targeting a disciplined investment to expand its CFO.
The analyst believes that COP could very well outperform its large-cap peers in the E&P industry as it has “a low Break-Even Point where it can fund its production maintenance capital and dividends at below $40/bbl [barrel] (WTI) [West Texas Intermediate].”
The break-even point is defined as a particular price point for oil where upstream oil and gas companies can make money (or profit), resulting in further investment.
Hanold added that this low break-even point for COP is supported by one of the best base decline rates among its peers, so that COP requires 35% less capital to sustain production versus its peers.
Base decline rate is calculated by identifying the actual or forecasted production of all oil wells onstream at the start of the year and keeping track of their cumulative decline by the end of the year.
Considering these positive factors, Hanold is bullish with a Buy rating and a price target of $100 (20.5% upside) on the stock.
Hanold’s view is also echoed by the rest of the analysts on the Street, with a Strong Buy consensus rating on ConocoPhillips, based on 14 Buys and 3 Holds. The average COP stock prediction of $95.12 implies upside potential of approximately 14.6% to current levels for this stock.
Chevron Corp. (NYSE: CVX)
Chevron Corp. is an integrated chemicals and energy company that engages in the manufacture, development, and transport of crude oil and natural gas. The company’s business segments include Upstream, Downstream, and Chemical Operations.
Late last year, Chevron announced a capital and exploratory budget of $15 billion for 2022, an increase of more than 20% from the expected levels in 2021. According to the press release, this program will support “Chevron’s objective of higher returns and lower carbon, including approximately $800 million in lower carbon spending.”
The company is poised for an upward trajectory this year, considering it reported one of the highest third-quarter earnings in FY21 since Q1 of 2013. According to Mike Wirth, Chevron chairman and CEO, this growth was “largely due to improved market conditions, strong operational performance and a lower cost structure.”
It remains to be seen whether this stellar performance will continue in Q4; the company is expected to announce its Q4 results on January 28.
The company’s financial discipline also helped it to generate its best-ever free cash flow of $7.1 billion during Q3, excluding working capital. Free cash flow (FCF) is the cash generated by the company after accounting for cash outflows that support its operations.
RBC Capital analyst Biraj Borkhataria pointed out in his research report that on an unlevered FCF yield basis, CVX proved to be competitive relative to its peers, with a FCF yield estimated to be 12% in FY2022.
Based on this yield and the higher commodity prices, the analyst expects Chevron to return “significant amounts of capital” to shareholders over time.
Indeed, it is one of the Top Dividend stocks on TipRanks and paid out $2.6 billion in dividends in Q3.
It is important here to note that for Chevron, earnings are mostly dependent on the profitability of its Upstream business segment, which is highly susceptible to the movement in oil prices. As a result, with rising oil prices, Chevron’s upstream oil business could benefit significantly.
Moreover, Borkhataria is also upbeat about Chevron’s prime position in the lucrative Permian Basin and considers it CVX’s “most valuable asset.” With its purchases in the Permian and Marcellus basins, CVX has positioned itself as the second-biggest oil corporation in the U.S.
As a result, the analyst upgraded the stock from a Hold to a Buy and raised the price target from $130 to $145 (14% upside) on the stock.
The rest of the analysts on the Street are also bullish with a Strong Buy consensus rating on Chevron, based on 13 Buys and 3 Holds. The average Chevron stock prediction of $140.43 implies upside potential of approximately 10.4% to current levels for this stock.
Bottom Line
The bullish stance on both stocks seems to indicate that analysts expect both oil companies to benefit from the strong commodity cycle this year, as oil prices are on the upswing. However, based on the upside potential over the next 12 months, COP seems to be a better Buy.
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