3 Buy-Rated Energy Stocks to Consider as Oil Price Surges Past $80

The price of oil has been surging over the past few weeks, hitting its highest level in three years. The main reason for this rally is the global oil supply-demand deficit caused by a higher-than-expected demand recovery in Asia as the impact of the Delta coronavirus variant is fading.

The high demand for energy stocks is evidenced by The Energy Select Sector SPDR ETF (XLE) 51.7% gains year-to-date (YTD) compared to S&P 500 Trust ETF’s (SPY) 21% returns over the same period.

With this in mind, I am going to analyze three energy stocks Kosmos Energy Ltd. (KOS), ConocoPhillips (COP), Marathon Oil Corporation (MRO), which Wall Street analysts predict to rally in the coming months amid the global oil shortage. 

Kosmos Energy Ltd. 

Kosmos Energy Ltd. engages in deepwater independent oil and gas exploration and production activities. Year-to-Date, its shares are up about 75%.

There are a lot of reasons why analysts are bullish on KOS. First, the company is actively strengthening its balance sheet by reducing debt obligations. For this reason, the company recently issued 37.5 million shares of its common stock and offered $400 million of senior notes, maturing in 2027. The negative impact of such news on its stock was offset by surging oil prices, pushing the KOS stock to its 52-week high of $4.24.

In terms of financials, although the company missed Wall Street expectations by $38.95 million, its revenues increased by 201.7% year-over-year to $384.05 in the second quarter of 2021. The company also reported Non-GAAP EPS of ($0.03), missing analysts’ consensus by $0.09. However, Kosmos delivered a solid free cash flow of $115 million in Q2.

Analysts also expect this growth to continue in the next quarter. The company’s EPS for the third quarter should increase 50% YoY to ($0.06). Following the same trend, its revenue for the next quarter is projected to advance 37.55% YoY to $309.20 million. Also, the company is expected to increase its production to 53,000 – 57,000 boe per day in FY2021, which might lead to higher cash generation.

Finally, with the recent share price rally, the company still looks attractive from a valuation standpoint. In terms of EV/EBITDA FWD, the stock’s 4.70x is 42.2% lower than the 8.14x sector median. Also, the company’s FWD P/S multiple of 1.36x trades well below the sector median.

Analysts have established a “Strong Buy” rating for KOS, with an average price target of $4.15.

ConocoPhillips

Founded in 1875, ConocoPhillips is an energy company that engages in the exploration, production, transportation, and selling of crude oil, bitumen, natural gas, natural gas liquids, and liquefied. Since the beginning of the year, its shares are up about 90%. 

In my opinion, the company is in a solid position to generate long term returns because of its recent acquisition of Shell’s Permian Basin assets for $9.5 billion. The deal will allow COP to expand its presence in the Permian region as well as increase its production capabilities considering an inventory of 4,700 undrilled Permian wells.

In terms of financials, the company topped both EPS and revenue estimates in the second quarter of 2021. In Q2, the company’s revenue stood about 154% higher year-over-year at $10.21 billion, primarily due to higher realized commodity prices and higher sales volumes. The company ended the first half of 2021 with a cash flow from operations of $6.33 billion, up about 180% from a year ago. As a result, the company’s annual dividend payout is expected to be $1.84 per share, leading to a dividend yield of 2.44%. Although COP’s dividend yield is lower than the sector’s median of 4.30%, its payout ratio stands only at 35.91%, leaving a lot of space for future increases. 

The company’s EPS is expected to lift to $1.45 in the third quarter of 2021, exceeding its year-ago figure of ($0.31). Its revenues are projected to advance 146.90% YoY to $10.81 billion in Q3. Moreover, the company plans to produce 1.48-1.52 billion barrels of oil a day in the third quarter, excluding Libya. COP also intends to repurchase $3.5 billion of its shares by the year-end, which could act as a bullish catalyst for its stock.

When it comes to valuation, the company’s FWD P/E of 14.70x and FWD P/S of 2.48x look expensive compared to the sector’s median. However, I believe the company’s expected growth rates could justify this premium.

Analysts have rated COP as a “Strong Buy”, setting an average price target of $86.07.

Marathon Oil Corporation

Founded in 2001, Marathon Oil Corporation is a leading oil and natural gas exploration and production company that operates in the United States and Africa. YTD, shares of Marathon Oil Corporation are up about 147%. 

On August 4th, MRO issued an earnings report for the second quarter of 2021. The company reported impressive revenue growth by 320.2% year-over-year to $1.14 billion, beating Wall Street revenue estimates by $23 million. This enormous growth was driven by an increase in realized prices for both crude oil and condensate, NGLs, and natural gas. MRO delivered higher-than-expected Non-GAAP EPS of $0.22. The company also increased its quarterly dividend by 25% to $0.05 per share. So, MRO’s healthy balance sheet, along with solid top and bottom-line growth, could be solid arguments in terms of bullish bias.  

In addition, MRO improved its liquidity position, increasing its cash on hand by 30.7% year-over-year to $970 million. The company also intends to decrease its long-term debt by $900 million, repaying 3.85% Senior Notes Due 2025 by the end of Q3. That’s another positive sign for shareholders. 

Analysts anticipate the current growth to continue in Q3. MRO’s EPS is projected to rise to $0.31. Its revenue should lift by 71.70% YoY to $1.29 billion in Q3. The company also increased its full-year production guidance by 5,000 net boed, which can substantially boost its top-line figure if the oil price keeps rising.

In terms of valuation, the company’s FWD P/E of 14.75x and FWD EV/Sales of 3.43x look overvalued compared to the sector at first glance. However, there’s no reason to worry as they reflect a premium caused by the strong fundamentals. 

Analysts have set a “Moderate Buy” rating for MRO, with an average price target of $17.64.