Oil prices have been in a serious state of flux. In August and in the start of September it looked as though oil was going to keep selling off into a weakening economy. Now, oil is back up a bit but its chart is not the greatest. Oil, gas and almost any other market right now all seem to be stuck in the waiting lounge ahead of the Federal Reserve’s decision on interest rates this week.
Oggonomics has seen the “strategic” investments in oil and gas come and go. The issue to consider for longer-term investors is that oil remains a secular theme because global oil demand is expected to keep rising and not really begin to fall until after 2040. There are significant headwinds that may give strategic bears an advantage at the present time, but the projected upside from analysts even after price targets have been slashed makes the energy sector a mixed bag.
It was just a week ago when Barron’s said oil stocks may bounce back as the situation is better than it looks. Multiple analyst reports covering the energy sector have come out since then. The energy markets are currently in a strategic tug-of-war. Oh, and there is election and geopolitical uncertainty to consider as well. The Barron’s tout was using a Schlumberger Limited (NYSE: SLB) report from Evercore ISI (with an Outperform rating and a $74 price target) implying the stock could nearly double from its current price.
Barron’s opined that Schlumberger deserves a fresh look after now being completely overlooked (or ignored) by the stock market. Its shares have fallen from $55 earlier in 2024 to $40.00 on last look. SLB yields 2.75% on its dividend and the company could be set to spend close to $4 billion on stock buybacks in 2023 and 2024 combined.
There are multiple issues weighing on oil in general right now. It’s not just the anticipation of lower interest rates either. China’s demand has been less robust as its economy remains weak and the rise in oil drilling and production now may have oil in oversupply. If the oil market is in oversupply, and demand doesn’t see any increase, then supply-demand economics would dictate that the price of oil is heading lower.
As the analyst community has been trimming oil price forecasts, there are stock analysts also tweaking their energy stock ratings and price targets. Exxon Mobil’s market cap is nearing $500 billion, and Chevron’s market cap is $258 billion.
Morgan Stanley issued a North American Energy sector report on Monday titled “Revisiting the Setup Across the Sector.” Along with many price target changes, the sector’s 10% underperformance in the third quarter alone is shown as rate cuts, softer oil prices and slowing inflation all creating headwinds for the energy sector. Morgan Stanley’s strategic view at this time — remain selective and continue to prefer defensive sub-sector positioning (Midstream, Majors) and favoring gas over oil in exploration and production.
Exxon Mobil Corporation (NYSE: XOM) saw two competing calls on Monday. Exxon Mobil was maintained as Neutral at Mizuho, but the firm did adjust its price target slightly higher to $130 from $128. Morgan Stanley maintained its Overweight rating but lowered its price target to $142 from $145. Exxon shares were trading up about 1% at $112.42 on Monday. Both of these price targets would imply new all-time highs after adjusting for dividends. Exxon Mobil’s current dividend yield is 3.4% with a $57 billion market cap. Assuming no major dividend hike, SLB could spend as much as $4 billion in 2024 and 2025 in combined stock buybacks.
Chevron Corporation (NYSE: CVX) dropped from $160 to under $140 from late July into mid-September, but its stock has recovered marginally back up to $141.25 (up about 0.45% on Monday). Mizuho maintained its Outperform rating on Monday but still lowered Chevron’s price target down to $189 from $205. As Chevron peaked at $167 earlier in 2024, the last time this stock was ever as high as the Mizuho target was back in 2022. Chevron’s dividend yield is now about 4.6%.
Diamondback Energy Inc. (NASDAQ: FANG) lost about 10% of its value in the first half of September and its shares have recovered less than 2% to $172.50 after touching under $170 three trading sessions ago. Jefferies resumed its FANG coverage with a Hold rating and a $185 price target on Monday. At the same time, Morgan Stanley reiterated Diamondback Energy’s Overweight rating and raised its price target to $198 from $185.
Morgan Stanley’s report said:
During 3Q, the Energy sector has lagged the broader market by nearly ~10% driven by a weakening crude supply-demand outlook and broader economic concerns. Over the same time period, crude prices have pulled back ~18%, natural gas prices are down ~7%, and refining margins have declined by ~40%. Beyond the pullback in commodities, slowing inflation and the prospect of interest rate cuts have also historically been headwinds for Energy performance. In this backdrop, we continue to prefer more defensive positioning including Midstream and the US Majors. Within producers, we favor natural gas over oil exposure into next year, and for Services, select international exposure over US.
Morgan Stanley has also trimmed price targets on many companies in the energy sector on Monday. Here are some of the calls on larger oil and gas stocks that were seen:
- Antero Resources Corporation (NYSE: AR) maintain Overweight but target cut to $38 from $39 (versus $26.75 share price).
- Baker Hughes Company (NYSE: BKR) maintain Overweight but target cut to $42 from $43 (versus $33.79 share price).
- Chart Industries, Inc. (NYSE: GTLS) was raised to Overweight from Equal Weight with the same $175 price target (versus $116.25 share price).
- Devon Energy Corporation (NYSE: DVN) maintain Overweight but target cut to $51 from $55 (versus $39.50 share price).
- EOG Resources, Inc. (NYSE: EOG) maintain Equal-Weight but target cut to $132 from $134 (versus $121.00 share price).
- EQT Corporation (NYSE: EQT) is Morgan Stanley’s top pick in E&P and the firm has an Overweight and $45 price target (versus $33.67 share price).
- Marathon Petroleum Corporation (NYSE: MPC) maintain Overweight but target cut to $182 from $196 (versus $160.00 share price).
- PBF Energy Inc. (NYSE: PBF) maintain Equal-Weight but target cut to $38 from $48 (versus $32.50 share price).
- Phillips 66 (NYSE: PSX) maintain Equal-Weight but target cut to $144 from $150 (versus $126.75 share price).
- Range Resources Corporation (NYSE: RRC) reiterated as Underweight and its target was cut to $31 from $33 (versus $29.35 share price).
- Transocean Ltd. (NYSE: RIG) maintained as Equal-Weight but target cut to $5 from $7 (versus $4.25 share price).
Two key upgrades were noted on the infrastructure side of oil and gas. There were seen as follows:
- Kinder Morgan Inc. (NYSE: KMI) was raised to Equal-Weight from Underweight with a $24 price target at Morgan Stanley. KMI was last seen at $21.50 with a 5.4% yield. KMI shares are within about 1% of a 52-week high and is close to challenging levels not seen since 2016 to 2017.
- ONEOK, Inc. (NYSE: OKE) was raised to Overweight from Equal-Weight and its price target was raised to $111 from $103 at Morgan Stanley. ONEOK was last seen at $93.00 with a 4.3% dividend yield. This just hit an all-time high.
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Crude oil futures were at $80 back in July, and a mid-August recovery failed to get back to $80 in light crude oil futures. It was down to $66 as recently as September 10 and the prices on September 16 were right around $70.00.
The Energy Select Sector SPDR Fund (NYSEArca: XLE) was last seen up 0.8% at $86.25 on Monday, with a 52-week range of $78.98 to $98.97. While this key ETF has recovered about 2% in recent days, the year-to-date stock chart’s peak in April has since shown a wave of lower lows and lower highs when the stocks have tried to recover. To see which stocks dominate here, Exxon Mobil makes up 23.7% and Chevron makes up 16.7% in the ETF — with no other stocks even showing a 5% weighting.
