2/11/22 6:08:00 MW Oil is the hottest sector, and Wall Street analysts see upside of up to 48% for favored stocks.
Analysts favor Canadian oil companies but also some large U.S. players, such as ConocoPhillips, Schlumberger and Valero
Energy is the best-performing stock-market sector this year. Given today's strong economic growth and high inflation, many believe oil prices could remain at current high levels for years or maybe even more higher.
Below are two screens of stocks derived from the holdings of three exchange-traded funds that invest in oil and natural gas companies.
An oil price review
First, here's a chart showing the price movement of forward-month delivery contracts for West Texas Intermediate Crude Oil over the past 10 years:
That steep but brief plunge on the chart is April 2020 , when demand for oil tanked during the early days of the COVID- 19 pandemic, storage sites were full and those holding front-month futures contracts essentially had to pay people to take the oil off their hands.
Oil price expectations from here
So what lies ahead for oil prices?
In a report provided to clients on Feb. 10 , analysts at BCA Research said they believe prices will rise over the next decade in the face of increasing demand and declining supplies. Those threats to supplies include government action that curbs fossil-fuel production as well as "climate activism at the board level at major energy suppliers and in the courtroom."
In other words, the best intentions to reduce carbon emissions can push oil pries higher because alternate energy sources take a long time to be available in sufficient quantity to curb demand for fossil fuels.
The BCA analysts favor long-term exposure to oil through ETFs.
Three energy ETFs
If you agree with the above scenario you might want to consider a broad investment in the sector through one or more ETFs. Here's a quick look at three of them:
You might wonder why a foreign single-country ETF is included in the list, but Canada stands out with its expansion of fossil-fuel production. The iShares S&P/TSX Capped Energy Index ETF has outperformed the other two ETFs in recent years, while underperforming longer term.
Here's a comparison of total returns, with dividends reinvested, for the three ETFs and the SPDR S&P 500 ETF Trust (SPY) through Feb. 9 :
S&P 500 sector 2022 1 year 3 years 5 years 10 years 15 years 20 years Energy Select Sector SPDR Fund 24.1% 64% 31% 20% 33% 81% 355% iShares Global Energy ETF 21.7% 55% 22% 24% 18% 49% 262% iShares S&P/TSX Capped Energy Index ETF 19.0% 98% 49% 11% -10% -11% 177% SPDR S&P 500 ETF Trust -3.7% 19% 78% 117% 310% 328% 510% Source: FactSet
The iShares S&P/TSX Capped Energy Index ETF has shined over the past one and three years. You can also see how dramatically the oil price decline from mid 2014 through early 2016 hurt the energy sector's long-term performance.
A look ahead for the ETFs
Here are forward price-to-earnings ratios for the three energy ETFs and SPY, along with expected compound annual growth rates (CAGR) for revenue and earnings per share through 2023, based on consensus estimates among analysts polled by FactSet:
S&P 500 sector Ticker Forward P/E Two-year estimated sales CAGR Two-year estimated EPS CAGR Energy Select Sector SPDR Fund XLE 12.7 3.8% 14.1% iShares Global Energy ETF IXC 10.7 4.3% 9.4% iShares S&P/TSX Capped Energy Index ETF CA:XEG 8.6 4.1% 9.7% SPDR S&P 500 ETF Trust SPY 20.2 6.5% 9.1% Source: FactSet
From the forward P/E ratios, the energy ETFs might be considered cheap relative to SPY, however, they "earned" investors' mistrust during the long decline of stock prices from mid-2014 through early 2016, and, of course, early in the pandemic.
Analysts don't expect to see spectacular revenue growth for the energy portfolios over the next two years. However, they do expect better earnings growth than they do for the broad U.S. market -- especially for XLE.
Two energy stock screens
The three energy ETFs together hold 63 stocks. The two screens below show which ETF or ETFs hold each stock.
First screen: dividend yields
Given what appears to be a healthy environment for oil prices, a broad round of dividend cuts, such as those we saw early in the pandemic, appears unlikely. With that in mind, the first screen of the 63 stocks held by the three ETFs is simply by dividend yield.
Here are the 21 stocks held by the three ETFs with the highest dividend yield (over 4%), along with a summary of analysts' opinions of the stocks. Share prices and consensus price targets are in the currencies of the country where the stocks are listed. Company Ticker Country Dividend yield Share "buy" ratings Closing price -- Feb. 9 Cons. Price target Implied upside potential Held by Petroleo Brasileiro SA ADR Pfd PBR.A Brazil 16.05% 57% 12.26
14.79 21% IXC Petroleo Brasileiro SA ADR PBR Brazil 14.66% 50% 13.42 14.09 5% IXC Enbridge Inc. CA:ENB Canada 6.32% 57% 54.44 55.16 1% IXC Kinder Morgan Inc Class P KMI U.S. 6.22% 21% 17.37 19.15 10% XLE, IXC Peyto Exploration & Development Corp. CA:PAY Canada 6.09% 67% 9.85 13.83 40% XEG Pembina Pipeline Corp. CA:PPL Canada 6.07% 39% 41.49 43.97 6% IXC GALP Energia SGPS SA Class B PT:GALP Portugal 5.99% 52% 10.02 11.72 17% IXC ONEOK, Inc. OKE U.S. 5.88% 29% 63.64 66.00 4% XLE, IXC Williams Cos., Inc. WMB U.S. 5.58% 68% 30.47 32.09 5% XLE, IXC Freehold Royalties Ltd. CA:FRU Canada 5.41% 87% 13.30 16.60 25% XEG TC Energy Corp. TRP Canada 5.28% 35% 65.85 67.32 2% IXC Eni S.p.A. IT:ENI Italy 5.06% 67% 13.25 14.81 12% IXC TotalEnergies SE TTE France 5.04% 71% 52.40 55.55 6% IXC ENEOS Holdings, Inc. JP:5020 Japan 4.79% 78% 459.00 550.67 20% IXC Inpex Corp. JP:1605 Japan 4.71% 78% 1,147.00 1,371.11 20% IXC Suncor Energy Inc. CA:SU Canada 4.59% 64% 36.59 43.50 19% IXC, XEG Exxon Mobil Corp. XOM U.S. 4.46% 35% 79.00 80.75 2% XLE, IXC Valero Energy Corp. VLO U.S. 4.41% 81% 88.84 94.41 6% XLE, IXC Chevron Corp. CVX U.S. 4.12% 74% 137.79 144.41 5% XLE, IXC Phillips 66 PSX U.S. 4.11% 79% 89.45 99.31 11% XLE, IXC OMV AG AT:OMV Austria 4.07% 50% 56.46 62.51 11% IXC Source: FactSet
You can click on the tickers for more about each company.
Then read Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.
Don't assume dividends are distributed quarterly, as is common for U.S. stocks. Some companies only distribute annually.
Also note that the highest-yielding stocks on the list are American depositary receipts of Petroleo Brasileiro SA (known as "Petrobas") common shares (PETR4.BR) and preferred shares . Unlike traditional preferred stocks issued in the U.S. , this Petrobas preferred issue has no par value. (More information about the Petrobas ADRs is available in this filing from Dec. 21, 2021 with the Securities and Exchange Commission .)
Any stock with a dividend yield above 14% has a built-in warning. If investors expected the dividend to be safe, the share price would be higher and the dividend yield lower. So this is an investment that might best be left to professionals or other sophisticated investors.
Second screen: analysts' picks
Going back to our combined list of 63 stocks, here are the 18 favored by at least 80% of analysts polled by FactSet, sorted by 12-month upside potential as implied by consensus price targets. You can see that analysts favor many of the Canadian oil and gas producers in lockstep: Company Ticker Country Share "buy" ratings Closing price -- Feb. 9 Cons. Price target Implied 12-month upside potential Dividend yield Held by Birchcliff Energy Ltd. CA:BIR Canada 88% 6.63 9.78 48% 0.60% XEG Tourmaline Oil Corp. CA:TOU Canada 100% 45.59 63.40 39% 1.58% XEG Parex Resources Inc. CA:PXT Canada 100% 26.85 36.73 37% 1.94% XEG ARC Resources Ltd. CA:ARX Canada 100% 14.49 19.42 34% 2.76% XEG Whitecap Resources Inc. CA:WCP Canada 93% 9.02 11.69 30% 2.99% XEG Enerplus Corporation ERF Canada 85% 14.77 19.07 29% 1.10% XEG Secure Energy Services Inc. SES Canada 100% 6.12 7.81 28% 0.49% XEG Tamarack Valley Energy Ltd. CA:TVE Canada 85% 4.90 6.25 28% 2.03% XEG Freehold Royalties Ltd. CA:FRU Canada 87% 13.30 16.60 25% 5.41% XEG Cenovus Energy Inc. CVE Canada 100% 19.09 23.29 22% 0.73% IXC, XEG Santos Limited AU:STO Australia 88% 7.50 8.90 19% 1.95% IXC Shell PLC UK:SHEL United Kingdom 80% 20.28 23.87 18% 3.25% IXC Diamondback Energy, Inc. FANG United States 85% 128.88 144.36 12% 1.55% XLE, IXC ConocoPhillips COP United States 86% 92.95 102.25 10% 1.98% XLE, IXC Pioneer Natural Resources Company PXD United States 82% 221.82 241.53 9% 3.08% XLE, IXC Schlumberger NV SLB United States 90% 39.40 42.66 8% 1.27% XLE, IXC Valero Energy Corp. VLO United States 81% 88.84 94.41 6% 4.41% XLE, IXC EOG Resources, Inc. EOG United States 82% 113.31 118.03 4% 2.65% XLE, IXC
Source: FactSet
As always, do your own research and form your own opinions about which investments, whether through ETFs or other funds or a combination of those and/or individual stocks, match your investment objectives.
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- Philip van Doorn
