- The global energy sector climbed to new highs last week as crude oil and natural gas prices rose.
- With no end in sight to elevated oil and gas, Wall Street analysts continue to raise their earnings estimates
- Too hot to touch or too hot to ignore?
- That is the question when it comes to sizzling energy stocks.
The global energy sector climbed to new highs last week as crude oil and natural gas prices rose. It is a stunning reversal for a group that two years ago investors dared not touch with a 10-foot pole.
With the backdrop of banned Russian imports, rising global demand and tight supplies are pushing the price of oil higher again after it corrected from a 14-year high set in March. Natural gas prices are also climbing ahead of the summer air conditioning season. These trends bode well for the profitability of oil- and gas-related companies, many of which look poised for a second straight quarter of record results.
With no end in sight to elevated oil and gas, Wall Street analysts continue to raise their earnings estimates for North American oil producers, refiners, and pipeline operators. This has many investors riding the momentum in energy stocks despite their 50% year-to-date surge.
Based on forward-looking earnings estimates and sell-side price targets, there appears to be a lot more in the tank for these three energy companies.
Is Halliburton Stock Still a Buy?
Halliburton Company (NYSE: HAL) is up more than 80% this year but analysts are still calling it a buy. That’s because the oilfield equipment and services provider is expected to deliver similar performances to last quarter’s 24% revenue growth and 84% bottom line improvement.
The company is seeing strong demand from both the North American and overseas markets with oil explorers rushing to capitalize on the favorable pricing environment. Margins are on the rise as is Halliburton’s willingness to share the wealth. The board recently tripled its quarterly dividend payment and is likely to approve additional hikes given a payout ratio under 20%.
The consensus earnings estimate for the full year implies 77% growth over the recovery year that was 2021. Halliburon’s forward P/E ratio of 23x has room to expand as does the share price. Most Street price targets issued since the Q1 update are in the upper-$40’s and a few have a five-handle.
Will Phillips 66 Stock Keep Going Up?
Phillips 66 (NYSE: PSX) is benefitting from elevated commodity prices in a bit different way. As both a midstream and downstream operator, the company is generating revenue from the transportation of oil and natural gas liquids (NGL) as well as the manufacture of petrochemicals and plastics.
In Q1, Phillips 66 swung to a profit that was almost the mirror image of the net loss it recorded in the year prior period. Revenue soared 68% to $36.7 billion led by strong performances in the Chemicals and Refining businesses. With demand for refined products like gasoline, diesel, and jet fuel expected to trend higher, Wall Street is now forecasting a massive $5.00 bump in 2022 earnings per share (EPS) to $9.62.
Profits are expected to normalize by next year but still remain well above where they were in 2021. Even after advancing 40% this year, the shares are trading slightly below their five-year historical trailing P/E of 19x.
Like a lot of energy stocks, Phillips 66 is at a 52-week high but well below its all-time high set prior to the start of the pandemic. This month, five firms have reiterated their buy ratings including Piper Sandler, which raised its target to a Street-high $120 noting that there’s more “legs” to this rebound story.
What is the Upside for Enbridge Stock?
Enbridge Inc. (NYSE: ENB) has more than doubled from its March 2020 low but remains approximately 20% away from its record high. North America’s leading energy infrastructure provider delivered 24% top line first quarter growth but posted a surprising drop in earnings tied to foreign exchange hedging losses in its Energy Services segment. The forex setback cast a shadow on what was otherwise an outstanding quarter but is expected to be more of an anomaly than a pattern.
Analysts are forecasting higher overall profits in each of the next three quarters as Enbridge meets the need for its extensive network of oil and natural gas pipelines during the economic recovery. The company is responsible for most Canadian crude exports to the U.S. and nearly one-fifth of U.S. natural gas consumption. It also has an emerging wind energy business with facilities located off the shores of Canada and Europe.
Much of the return potential for Enbridge comes from the company’s generous dividend payout. The most recent quarterly dividend implies a 5.7% forward yield which is well above the sector average. So while recent analyst price targets point to minimal share price upside, investors can expect a substantial dividend yield to contribute to the stock’s total return.