The stock market’s double from pandemic lows pales in comparison to what has unfolded in the oil market.
Less than two years removed from trading below $20 (when some futures contracts were priced well into the negatives) WTI crude oil prices have quadrupled—and appear well on their way to five-bagger territory.
Benchmark oil prices have climbed above $90 this month for the first time since 2014. The days of $140 oil seen in 2008 still appear light years away, but may not be that distant given current market dynamics.
Most recently, the price of oil has been lifted by the threat of Russian military action in Ukraine which could lead to sanctions and disrupt the flow of energy supplies in the region. This along with the underpinning of strong global demand during the economic recovery has made the once unwanted oil a hot commodity.
Of course, with surging oil prices comes increased drilling activity from oil producers and elevated demand for oilfield services. This is driving a sharp rebound in the financial results of oil-related companies, and in turn, their stock prices.
While most sectors are down year-to-date, energy stocks are on fire. Seventeen of the S&P 500’s top 20 performers are oil & gas companies. In the spirit of the Winter Olympics, Occidental Petroleum, Halliburton, and Schlumberger currently sit in the gold, silver, and bronze positions, respectively. Will they be at the podium during 2022’s closing ceremonies?
Why is Occidental Petroleum Stock Up?
Occidental Petroleum Corp. (NYSE: OXY) has soared 47% so far this year to lead all other S&P 500 components. The diversified energy group continues to recover from 2020’s all-time lows thanks to the ideal combination of higher commodity prices and higher sales volumes. In addition to crude oil, Occidental sells natural gas and natural gas liquids which have contributed to a return to profitability.
The stark improvement in cash flow has supported the stock’s uptrend because investors have grown less concerned about Occidental’s hefty debt burden. Its recent acquisition of Anadarko, while expected to be positive in the long-run, saddled the company with a heavy liability.
Yet with a stronger presence in the Permian Basin and financial performances on the upswing, Occidental is now in a better position to tackle its balance sheet. Analysts are forecasting EPS of $3.88 this year which means the stock remains inexpensive at 11x forward earnings. Look for further multiple expansion and a return to pre-pandemic price levels in the near future.
Is Halliburton a Good Value Stock?
Oil equipment and services provider Halliburton Co. (NYSE: HAL) is up 46% year-to-date rapidly building off a 21% advance in 2021. Last month the company reported profits that were twice what was reported in the fourth quarter of 2020. This was a result of elevated oil drilling activity tied to the rally in oil pricing.
Demand for Halliburton’s oilfield wares and services have undoubtedly stayed strong with oil prices climbing to new highs to start the year. This has Wall Street scrambling to revise full-year earnings estimates for the second year in a row. The current consensus for 2022 EPS is $2.36 but this stands to increase if the trajectory in crude continues. Still, 14x forward earnings is a reasonable price to pay for one of the leading equipment providers in the world.
Halliburton is also becoming more attractive to value investors because it recently hiked its dividend. The 1.4% forward dividend yield isn’t huge, but further increases are likely with demand for oilfield services showing no signs of slowing.
Is Schlumberger Stock a Buy?
Up 34% already in 2022, Schlumberger NV (NYSE: SLB) has nearly matched its return for all of 2021 (37%). Like Halliburton and other oilfield service peers, the company is benefitting from steadily increasing demand from oil producers across its global footprint.
Revenue from services like formation evaluation, seismic testing, and directional drilling drove another strong result in the fourth quarter. EPS of $0.41 capped a banner year for Schlumberger in which profits were up 88%. More of the same is likely for this year.
Aside from the surge in oil prices, Schlumberger’s margins are poised to expand due to its recent restructuring. The elimination of $1.5 billion of operating costs has resulted in a much leaner business model that is enabling the company to stretch its industry-leading investment returns. Its 11% return on equity (ROE) over the last 12 months sits well above its peer group average.
Schlumberger remains one of the most well-liked energy plays on the Street. In the wake of management’s Q4 update and bright outlook, 14 sell-side firms unanimously gave the stock a buy rating. Their remarkably tight price targets ranging from $42 to $48 should give investors comfort that this energy winner will soon gush past its pre-Covid peak.
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