The price of a barrel of oil has jumped by nearly 60% over the past 12 months from around $50 to nearly $80. Crude’s price increase has been marred by intermittent concerns that OPEC would hike output and that COVID-19 would slow down global growth. Since December 1, when crude traded for around $65 a barrel, the price of a barrel of crude rose has risen by 20%.
[in-text-ad]
Analysts at Bank of Americas Securities on Monday published a research note on U.S. oil and gas producers, along with several ratings changes, that reflects the firm’s belief that the sector will see a post-COVID demand recovery this year. They believe the sector is undervalued by about 30%:

[W]e expect investor apathy conflated with ESG concerns to be replaced by what we would regard as a more rational view on the value proposition of ‘old energy’, against a realistic pace of any energy transition & anchored on transparent valuations defined by free cash flow and defended by outsize cash returns prioritized over growth.

BofA’s analysis is based on two main points: Saudi Arabia (along with Russia) “has de-facto control of oil markets” and the kingdom will continue efforts to contain volatility in global oil markets; and U.S. producers have “unprecedented capacity to return cash to investors, with average sector [free-cash-flow] yield of 20% in 2022.”

Before looking at BofA’s top ideas for the sector, here are the 11 new and changed ratings the firm made Monday morning.

Canada-based Suncor Energy Inc. (NYSE: SU) was initiated with a Buy rating and a price objective of $40 (C$44). Suncor’s estimated share-price upside in 2022 is 30%, and BofA estimates free cash flow yield (before dividends) for the year at 15%. Suncor’s total return for the past 12 months is 48.4%.

Exxon Mobil-controlled Canadian producer Imperial Oil was initiated with a Buy rating and a price objective of C$60. Imperial’s estimated share-price upside in 2022 is 25%, and BofA estimates free cash flow yield (before dividends) for the year at 10%. Suncor’s total return (on Toronto-traded shares) for the past 12 months is nearly 80%.

Oklahoma-based Chesapeake Energy Inc. (NYSE: CHK) was initiated with a Buy rating and price objective of $90. Chesapeake’s estimated share-price upside in 2022 is 35%, and BofA estimates free cash flow yield (before dividends) for the year at 16%. Chesapeake only began paying dividends in May and does not yet have a 12-month return.

California Resources Corp. (NYSE: CRC) was initiated with a Buy rating and a price objective of $64 a share. The estimated share-price upside in 2022 is 47%, and BofA estimates free cash flow yield (before dividends) for the year at 12%. The company’s total return for the past 12 months is about 73%.
[in-text-ad]
Canadian Natural Resources Ltd. (NYSE: CNQ) was initiated at Neutral with a price objective of C$68 (about $53.80). Its estimated share-price upside in 2022 is 17%, and BofA estimates free cash flow yield (before dividends) for the year at 17%. The company’s total return (on Toronto-traded shares) for the past 12 months is almost 80%.

Denbury Inc. (NYSE: DEN) was initiated at Neutral with a price objective of $92. Denbury’s estimated share-price upside in 2022 is 15%, and BofA estimates free cash flow yield (before dividends) for the year at 14%. Its total return for the past 12 months is nearly 177%.

National Fuel Gas Co. (NYSE: NFG) was initiated at Underperform with a price objective of $66. Its estimated share-price upside in 2022 is 3%, and BofA estimates free cash flow yield (before dividends) for the year at 5%. The company’s total return for the past 12 months is 52%.

Devon Energy Inc. (NYSE: DVN) was downgraded from Buy to Neutral, but the price objective raised from $50 to $57. Devon’s estimated share-price upside in 2022 is 18%, and BofA estimates free cash flow yield (before dividends) for the year at 14%. Devon’s total return for the past 12 months is about 176%.

Pioneer Natural Resources Inc. (NYSE: PXD) was downgraded from Buy to Neutral, and the price objective raised from $230 to $234. Pioneer’s estimated share-price upside in 2022 is 18%, and BofA estimates free cash flow yield (before dividends) for the year at 13%. Its total return for the past 12 months is about 56%.

Marathon Oil Corp. (NYSE: MRO) was downgraded from Neutral to Underperform, and the price objective raised from $18 to $19. The estimated share-price upside in 2022 is 5%, and BofA estimates free cash flow yield (before dividends) for the year at 16%. Marathon’s total return for the past 12 months is 138%.

Coterra Energy Inc. (NYSE: CTRA) was downgraded from Neutral to Underperform, and the price target lowered from $26 to $23. Coterra’s estimated share-price upside in 2022 is 12%, and BofA estimates free cash flow yield (before dividends) for the year at 12%. The company’s total return for the past 12 months is almost 33%.

In addition to these new and changed ratings, BofA listed eight oil and gas producers as its top ideas in the energy sector. Suncor was among the eight, with the analysts citing the company’s sector-low break-even price of $35 a barrel and its dividend coverage, “setting the stage for leading cash return growth off an already compelling yield proposition (~5.3% dividend yield).”
Here’s a quick look at the other seven top ideas. All have been given a Buy rating.

APA Corp. (NYSE: APA) has a price objective of $47, implying upside potential of 59% to last Friday’s closing share price. The company formerly known as Apache is expected to show a 23% free cash flow yield and already has committed to return 60% of free cash flow to shareholders.
[in-text-ad]
Hess Corp. (NYSE: HES) has a price objective of $131, implying upside potential of 54%. Cash flow is expected to rise by 64% year over year, largely on the strength of the company’s Liza project offshore of Guyanan.

Occidental Petroleum Corp. (NYSE: OXY) has a price objective of $52, implying upside potential of 59%. Even if crude oil were to average $60 a barrel in 2022, BofA thinks Oxy’s cash flow will still be around $7 billion. If debt reduction targets can be met by mid-year, that would “reset the dividend 5x and kick start buybacks to exploit high equity beta.”

Exxon Mobil Corp (NYSE: XOM) has a price objective of $100, implying upside potential of 46%. According to BofA, “Debt reduction, asset sales and project starts reload capacity for buybacks, while a refining recovery can close the gap of 50% upside to fair value.”

ConocoPhillips (NYSE: COP) also has a price objective of $100, implying upside potential of 27%. Conoco begins the year “with one of the most conservative [balance] sheets that has net debt/cap of 14%, prospective free cash yield of 14% and current dividend yield of 1.1%.”

EOG Resources Inc. (NYSE: EOG) has a price objective of $118, implying upside potential of 24%. The company is expected to reduce cost guidance over the course of 2022, improving further on the company’s $36 per-barrel break-even point. EOG also has the highest dividend yield of any pure-play exploration and production company at 3.3%.

Ovintiv Inc. (NYSE: OVV) has a price objective of $56, which implies upside potential of 47%. Formerly known as Encana, Ovintiv makes it to BofA’s top ideas list because the analysts believe the company’s free cash flow is “overly discounted, providing potential to meet its $3bn debt target ahead of schedule providing capacity for a step-change in cash returns via buybacks.”

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.