Rising oil and gas prices have been a much welcome development for energy stock investors. The once forgotten energy sector has gone from laggard in 2020 to leader in 2021 in a dramatic turn of events.
After the S&P 500 energy group tacked on another 8.9% gain last week, several energy companies reasserted their newfound market leadership. Among the top 10 S&P 500 performers year to date, four are energy names. Here we explain why at least three of them may have more room to run.
Does Marathon Oil Have More Upside?
Marathon Oil (NYSE:MRO) has rather quietly surged 80% this year. It trails only L Brands and Nucor at the top of the S&P 500 leaderboard. The stock has quadrupled from its April 2020 low thanks to a brighter outlook for energy demand and lessened supply crunch issues. This has spurred a sharp rebound in crude oil prices which have climbed above pre-pandemic levels.
As one of the largest global oil pure plays, Marathon Oil has reminded investors that in the cyclical world of commodities, making money is a marathon not a sprint. The company is still losing money, but that is expected to soon change. Higher realized prices and increased production at both its U.S. and international operations have analysts forecasting a return to profitability in fiscal 2022.
In terms of the technical analysis, a pair of bullish chart patterns also point to more upside for Marathon shareholders. A continuation wedge took root on April 27th pointing to a resumption of the broader uptrend towards the $14 to $15 range by next month. Then, last week a continuation diamond pattern formed on the daily chart suggesting a similar near-term move in the stock.
Based on the favorable fundamental backdrop and the technical picture, it may not be long before Marathon Oil takes over the lead in the 2021 S&P 500 race.
Why is Diamondback Energy Stock Up?
Move over Facebook, Amazon, Netflix, and Google, there's a new 'FANG' in town. Diamondback Energy (NASDAQ:FANG) is right on the heels of Marathon Oil with a 76% year-to-date return. This stock is riding a 6-month winning streak and is looking like it can stretch it to at least seven.
The up-and-coming oil and gas producer is best known for its strong presence in the Permian Basin, an oil rich region in western Texas and eastern New Mexico. Increased drilling activity there along with the recent acquisition of QEP Resources is expected to drive stronger production levels in a rising oil environment. Cost synergies are also forecast to result in improved profitability as QEP is integrated into the business.
Diamondback Energy also has a unique asset in its back pocket in its Rattler Midstream stake. It spun-off the energy infrastructure segment in 2019 but still owns 71% of the now public limited partnership which trades under the 'RTLR' ticker. This midstream business serves as a steadily growing source of revenue because this section of the industry focuses on the transportation, storage, and marketing of oil and gas products.
A bullish technical pattern is also in Diamondback Energy's favor. Back on December 4th, 2020, a somewhat rare megaphone bottom formed on the daily chart when the stock was trading in the high $40's. The megaphone announced a possible run to the $89 to $98 range within approximately six months. Fast forward to today and Diamondback is trading in the mid $80's. Based on the momentum in the business, there no reason to believe it can't slither into the $90's.
Is Devon Energy Stock a Buy?
Devon Energy (NYSE:DVN) is no slouch either. It has advanced 68% this year and has also strung together a six-month winning streak. This stock too has room to run and not just because it still sits about $100 from its record high of more than a decade ago.
This energy company is unique partly because it is based in Oklahoma when most oil majors are in Texas. It is also the largest independent oil and gas producer in the country with assets spread across the U.S. and Canada. Aside from owning a well-diversified portfolio of high-quality assets mostly in the shale-rich regions of North America, it is one of the lowest-cost producers in the industry.
Management is forecasting 2021 oil production to be 280,000 to 300,000 barrels per day, a substantial increase from last year. A ramp in low-cost production combined with higher oil prices should drive some above industry profit margins—and set Devon Energy up for some earnings beats.
Like Diamondback, Devon is also expected to benefit from synergies related to a recent takeover. It has merged with WPX Energy, a hydrocarbon exploration company with a strong presence in the Permian and Williston Basins.
And like Diamondback and Marathon, Devon Energy has bullish technicals. Its weekly chart formed a double bottom in December 2020 when Devon was trading around $17. It points to a climb into the low $30's which the stock appears to have in its sights.
So, three hot energy stocks with positive fundamentals and technicals. All have the wind at their back and aren't showing any sign of giving up their leading positions in the S&P.
Before you consider Marathon Oil, you'll want to hear this.
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