‘Staying Selective’: Mizuho Picks 2 Quality Oil & Gas Stocks for Long-Term Returns

The energy sector is notoriously sensitive. Everything from consumer demand to industrial demand to seasonal weather to changing political winds will impact the oil and gas markets, leaving investors with a difficult landscape to navigate.

Offering guidance through this intricate landscape is Mizuho’s sector expert, Nitin Kumar, who has clear advice for investors.

“Oil & Gas has the potential to rerate vs. the broader market, the low (~3.2%) weighting in the S&P 500 and narrow breadth of valuation/strategy differentiation make stock selection harder. We prefer to stick to larger, quality stocks with reserve depth, exposure to key themes, strong balance sheets and a commitment to cash generation/returns,” Kumar opined.

Following his own advice, Kumar goes on to recommend two of those ‘larger, quality stocks’ in the energy sector for long-term returns. We’ve opened up the TipRanks database to look at Kumar’s choices, and get a feel for the broader Wall Street view of both; here’s a closer look.

ConocoPhillips (COP)

The first Mizuho pick we’ll look at here is ConocoPhillips, one of the largest of the independent E&Ps – that is, oil and gas exploration and production firms – operating in the world today. With its market cap of $123 billion, ConocoPhillips ranks 6th among the world’s oil and gas producers; the company is a perennial holder of a top ten position in that grouping. ConocoPhillips is headquartered in Houston, Texas, and operates globally. The company’s activities – exploration, production, and transportation – are focused on crude oil, bitumen, natural gas, and natural gas liquids. The oil giant has active operations in the US and Canada, as well as Europe, the Middle East, East Asia, and Australia.

ConocoPhillips’ operations include both conventional and unconventional oil and gas plays. On the former, the company has holdings in super-giant fields in both Alaska and Norway, while in the unconventional category the company is active in four of North America’s largest plays – the Permian, the Eagle Ford, the Bakken, and Montney. In addition, the company has a large footprint, developed over 60 years, in the liquified natural gas industry and has 100% ownership of Alberta’s Surmont oil sand play.

Getting energy assets and products to the market is a job in and of itself, and ConocoPhillips has a large transportation infrastructure. The company operates extensive water pipelines, totaling 27,991 miles, in the North American, North Sea, and Asia-Pacific regions, carrying oil, natural gas, and natural gas liquids. The company also has extensive land pipelines, spread across the lower 48 states, as well as in Alaska and Indonesia.

In a recent expansionary move, ConocoPhillips announced on November 22 that it had completed its acquisition of Marathon Oil. The transaction was conducted entirely in stock and was valued at $22.5 billion. ConocoPhillips expects that its ownership of Marathon’s assets will generate more than $1 billion in synergies on a run-rate basis over the coming year.

Return-minded investors will be interested in ConocoPhillips’ dividend. The company is currently paying out a regular quarterly dividend of 78 cents per common share. This was declared on October 31 and represents a 34% increase year-over-year increase. At the new rate, the dividend annualizes to $3.12 per common share and gives a yield of 3.3%.

When we look at the company’s financial results, we see two key metrics in the 3Q24 earnings report. These were the bottom-line non-GAAP EPS, of $1.78 per share, which was 14 cents per share better than had been expected, based on $2.1 billion in adjusted earnings. The company also showed sound cash generation, bringing in $4.7 billion in cash from operations (CFO) for Q3. For the first nine months of the year, the CFO figure came to $14.9 billion.

Laying out the Mizuho stance, Kumar outlines ConocoPhillips’ sound current position, writing, “COP offers an enviable combination of long-duration inventory, a fortress balance sheet and peer-leading cash returns. While we took a cautious view of the Marathon acquisition earlier this year COP shares are down ~19% since announcing the deal, which in our view has sufficiently priced in the moderate inventory dilution associated with the deal. Moreover, with the acquisition now closed, COP is increasingly confident it can significantly over-deliver on deal synergies, with line of sight to capturing ~$1 billion of annual synergies (double its initial $500mm target).”

Looking ahead, Kumar adds of this oil company’s attraction for investors, “COP shares are now trading at a modest discount to key large-cap E&P/Major peers on EV/EBITDA and FCF/EV, despite investing key projects and lower oil prices particularly in 2025. Thus, we see a compelling entry point here for the stock.”

All in all, the ‘compelling entry point’ adds up to an Outperform (i.e. Buy) rating, and his $134 price target implies a 41% upside potential for the next 12 months. (To watch Kumar’s track record, click here)

This energy major has picked up 16 recent analyst reviews, with a breakdown of 14 Buys to 2 Holds for a Strong Buy consensus rating. The stock’s $95.12 trading price and $133.73 average price target together match the Mizuho forecast, of a 41% upside. (See COP stock forecast)

EQT Corporation (EQT)

The second stock we’ll look at is EQT, a $25 billion-plus natural gas company with extensive land holdings in the Appalachian region. EQT’s holdings extend across the Pennsylvania-West Virginia-Ohio region, in both the Marcellus and Utica shale formations. These are some of the richest natural gas production basins in North America, and EQT is one of the largest gas players on the continent.

EQT built up its leading position in the natural gas industry through a purposeful policy of growth-through-acquisition. The company’s most recent such move, completed this past July, was the acquisition of Equitrans Midstream. The acquisition brings a significant set of midstream assets into EQT’s portfolio. EQT has more than 4,000 drilling locations, and Equitrans has an extensive network of midstream transport assets, and EQT expects that it can realize as much as $425 million in synergies as it integrates these assets into its operations.

In its most recent quarterly report, covering 3Q24, EQT noted right off the bat that the Equitrans integration is approximately 60% complete – an important milestone, announced just three months after closing the acquisition. In another important note in the earnings report, EQT announced that it has entered into an agreement to sell off some of its non-operated natural gas assets. The assets in question, located in Northeast Pennsylvania, are expected to bring in $1.25 billion in cash from the sale.

Getting to results, EQT saw revenues of $1.28 billion in 3Q24, a figure that was up 8.2% from the prior-year period – although it missed the forecast by $110 million. At the bottom line, EQT realized $0.12 per share in non-GAAP EPS; while down sharply from the 30-cent EPS figure reported in 3Q23, the 3Q24 number was 5 cents better than had been anticipated.

Covering this stock, analyst Kumar likes the company’s scale, as well as its apparent ability to capitalize on the fundamental strength of the gas market. He says of the company, “EQT is the second largest gas producer in the U.S., and as such one of the key beneficiaries of a positive outlook on natural gas market fundamentals. The company has delivered on its asset sale target, and while it still needs to generate ~$2-3bn of FCF in 2025 to get to the $7.5bn YE25 total debt target, with ~60% of 2025 natural gas production hedged at a floor of ~$3.25/mmbtu we estimate Henry Hub prices would need to average below $2.75/mmbtu for the company to miss this target.”

All told, Kumar believes that EQT is in a good place for investors seeking a long-term play. He adds to his previous comments, “Meanwhile, the integration of ETRN should allow management to pursue the operational enhancements (e.g., compression) that it highlighted with the deal announcement in March. The lower cash flow breakeven from this combination not only provides a margin of safety for longer term cash generation, it allows EQT shareholders to participate more actively in the potential upside in U.S. natural gas prices.”

These comments support Kumar’s Outperform (i.e. Buy) rating on this stock, and his price target, set at $57, suggests that EQT will gain 33% by the end of next year.

The 19 analyst reviews on record for EQT include 11 Buys to 8 Holds, for a Moderate Buy consensus rating. The shares have a current trading price of $42.99 and an average target price of $48.47, which together indicate room for a 13% share appreciation in the next 12 months. (See EQT stock forecast)

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.