Your wallet might be groaning every time you fill up your vehicle these days, but one sector of the market is smiling from ear to ear. The energy sector just led the market in performance in 2021, and the best energy stocks for 2022 are hoping for many of the same tailwinds to carry them to continued outperformance this year.
Thanks to low supplies coming out of the worst of the COVID-19 crisis and surging demand last year, fossil fuel prices surged over the past few quarters. Using the most recent official Energy Information Administration data, global benchmark Brent crude oil averaged $81 per barrel during December – a $38-per-barrel increase from November 2020. The U.S. benchmark, West Texas Intermediate (WTI) oil, followed a similar trajectory higher.
The result? Energy stocks were the best S&P 500 sector with a 53% total return (price plus dividends). Dividends returned. So did buybacks.
Better news still: Supplies of crude oil and natural gas remain tight, which has many energy analysts believing that prices will stay in a “sweet spot” for energy-firm profitability for some time. Though oil-price growth shouldn’t be nearly as dramatic as in 2021.
“Crude and oil product prices should benefit from oil demand moving above 2019 levels,” say UBS analysts. “We expect Brent to rise into a $80-$90 range in 2022.”
Read on as we look at the nine best energy stocks to buy for a continuation of higher oil and gas prices in 2022.
Data is as of Jan. 5. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Analysts’ opinions courtesy of S&P Global Market Intelligence. Stocks are listed by analysts’ consensus recommendation, from lowest to highest.
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Exxon MobilGetty Images
Market value: $282.6 billionDividend yield: 5.3%Analysts’ opinion: 4 Strong Buy, 5 Buy, 18 Hold, 2 Sell, 0 Strong SellAnalysts’ consensus recommendation: 2.62 (Hold)Despite being the largest energy company in the U.S., Exxon Mobil (XOM, $66.75) hasn’t been king in recent years. Lower commodity prices have continued to hurt its shale-oil assets, while the pandemic dented demand for liquefied natural gas (LNG) and other fuels.
But perhaps XOM is ready to reassert itself.
Over the past couple of years, Exxon has been cutting costs and selling assets in Asia, Europe and Africa, as well as in the Barnett Shale, allowing it to focus on its best-performing assets. Now, Exxon’s breakeven costs to cover capital expenditures and dividends over the next five years is a meager $35 per barrel – meaning anything past that is pure upside.
In its third quarter, for instance, Exxon generated nearly $6.8 billion in profit, versus a $680 million loss in the year-ago quarter. Cash flows from operations were $12.1 billion, allowing Exxon to not only cover capital investments and its dividend, but reduce its debt. Indeed, results were so good that Exxon pledged to resume its stock-buyback program in 2022.
XOM also has going for it a forward price-to-earnings (P/E) ratio of just 11 that’s in line with the energy sector and well below the broader market, as well as a dividend yield of more than 5%.
For investors naturally drawn to big-yielding blue chips, Exxon looks like one of the best energy stocks of 2022. And the “smart money” certainly agrees, with XOM one of the most popular stocks among the hedge fund crowd.
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Magnolia Oil & GasGetty Images
Market value: $3.6 billionDividend yield: 0.8%Analysts’ opinion: 5 Strong Buy, 3 Buy, 7 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus recommendation: 2.13 (Buy)A midsized option to look at in the energy space is Magnolia Oil & Gas (MGY, $19.94).
This is a relatively new company, founded in July 2018, that explores for and produces oil and natural gas, primarily in the Eagle Ford Shale and Austin Chalk formations. And its limited operating history is a bit of a blessing. Because the firm went public at the tail end of the last energy downturn, management started out with a “lean and mean” business model. That includes only owning low-cost asset, living with its operational cash means and being prudent with its debt profile.
This has worked well so far. For instance, back in 2019, when WTI averaged $60 per barrel, Magnolia recorded pre-tax net income of $100 million. Based on consensus estimates, with 2021’s average of $61.25 per barrel, Magnolia should record more than $570 million in pre-tax profits.
Magnolia has already started a semiannual dividend program. The 8 cents per share it paid out was based on an average of $40-per-barrel oil, and management expects it can pay out 35 cents per share at an average of $55 per barrel. MGY has also already bought back nearly 13% of outstanding shares.
This isn’t a big or well-known company, but Wall Street is starting to lean in its direction, with eight Buys and Strong Buys, seven Holds and no Sells. Among energy stocks to buy for 2022, MGY could be a hidden gem.
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Phillips 66Getty Images
Market value: $34.3 billionDividend yield: 4.9%Analysts’ opinion: 7 Strong Buy, 8 Buy, 3 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus recommendation: 1.78 (Buy)After you pull crude oil or natural gas out of the ground, you need to do something with it in order to make it usable. That’s where the downstream or refining sector comes in. The base commodity is “cracked” under pressure into various fuels and other materials. One of the largest independent oil refiners in the U.S. is Phillips 66 (PSX, $78.32).
The key for PSX is that the firm isn’t just focused on producing gasoline for cars. It also has a hefty dose of chemicals production via its joint venture with Chevron (CVX). Here, Phillips is a major producer of high-density polyethylene (HDPE) plastic, polypropylene plastic and various other chemicals. For PSX, this focus on chemicals production rather than just transportation fuels has paid benefits.
As the economy has started to recover and plastics demand has risen, PSX has been able to turn this focus into better earnings. In the first three quarters of 2021, Phillips 66 managed to produce adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in its chemicals segment of $1.9 billion. That’s roughly double what it produced during all of 2020 and it still has one quarter in the fiscal year still left to report.
Its refining and midstream businesses have also seen big increases in earnings this year.
And speaking of those midstream assets, PSX is undergoing a major transformation. Last fall, the firm decided to swallow all the remaining public units of Phillips 66 Partners (PSXP) – its master limited partnership (MLP).
Thanks to tax changes, the MLP structure doesn’t make sense for many midstream firms anymore. In fact, the tax-step basis for these assets should help shield PSX from more taxes than having the MLP.
Phillips 66 “represents a simplified story and the removal of certain ‘headaches’ can help PSX resonate further with investors as energy markets recover,” says Raymond James analyst Justin Jenkins. He has an Outperform rating on PSX, which is the equivalent of a Buy.
“With the refining outlook likely grinding even higher from here as the world returns to normal, coupled with a strong outlook for the rest of the business, we think PSX is still one of the highest quality long-term stories in our coverage,” Jenkins adds.
All in all, PSX represents a play on rising demand and a growing economy. With its better earnings potential, strong dividends and steady base of earnings, the stock is one of the best energy stocks to buy for the new year.
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Baker HughesGetty Images
Market value: $22.3 billionDividend yield: 2.8%Analysts’ opinion: 14 Strong Buy, 9 Buy, 7 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus recommendation: 1.77 (Buy)It has been a wild ride for Baker Hughes (BKR, $25.68) to say the least. BKR has historically trailed some of the bigger oil services stocks, namely Haliburton (HAL) and Schlumberger (SLB). Then it was bought out by General Electric (GE) in 2017, only to be divested by the industrial conglomerate in 2019, with plans to sell its entire stake in the energy firm over the next few years. Baker Hughes has had more stock tickers than most companies, and recently went through a relisting on the Nasdaq.
But BKR may be having the last laugh.
One of the reasons why BKR has always been sort of behind Halliburton and Schlumberger was its focus on North America. HAL and SLB tended to have more international operations, while Baker focused mostly on the U.S. and Canadian energy markets.
During the booming days of $150-per-barrel oil and ultra-deepwater drilling back in 2008, this was a problem for Baker. But with the focus by many energy firms squarely on U.S. shale, BKR’s products are now firmly in demand. In its third quarter, overall orders for products and services grew 6% sequentially. This follows a big 12% sequential increase in orders in Q2. This has helped on the earnings and cash-flow fronts.
But where it gets exciting for BKR and provides a runway for growth is the firm’s focus on technology.
We don’t think of the energy sector as being high-tech, but technology is revolutionizing the way we find and drill for oil. And BKR is at the forefront of this.
The oil services firm has partnered with artificial intelligence (AI) software provider C3 AI to bring forth a whole series of services and data options for the oil patch. These solutions can optimize production, find new oil and lower costs.
Baker is also getting out ahead of the transition to more sustainable forms of energy. This includes adopting and deploying new products and services for hydrogen, carbon capture and renewable energy use.
The combination of being in the right place with the right products for now and in the future has made BKR one of the best energy stocks to buy. This is evidenced by its strong free cash flow – or the money a company makes after covering the capital expenditures needed to maintain the business – generation of $305 million last quarter and a nearly 3% dividend yield.
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EOG ResourcesGetty Images
Market value: $54.8 billionDividend yield: 3.2%Analysts’ opinion: 18 Strong Buy, 8 Buy, 8 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus recommendation: 1.71 (Buy)”If you ain’t first, you’re last.” – Ricky Bobby
Fictional NASCAR drivers aside, the quote does have a place in the oil patch. And EOG Resources (EOG, $93.60) is a prime example of that.
Before fracking and shale was a thing, EOG was a first mover into some of the more prolific shale fields in the U.S., including the Permian Basin, Eagle Ford and Bakken. This allowed the firm to amass some big-time acreage in these massive shale fields at rock-bottom prices. The win for EOG has been a low cost of production throughout its history.
And this continues today. According to EOG, the company can break even with oil at just $30 per barrel. And at just $36 per barrel, the firm has enough positive cash flow to fully fund its regular dividend payment.
But EOG isn’t resting on its laurels. Thanks to the bump in crude oil prices and continued advances in geology data mining and drilling technology, the energy stock has started to use what’s called a “Double Premium” drilling model. Here, EOG has been able to target around 5,700 drilling locations in its portfolio that produce more output per well and keep that production high for longer.
The result is that EOG is able to score millions of dollars more per well for not that much more in terms of costs. These double-premium wells can produce a 60% after-tax return rate at a breakeven cost of around $40 per barrel.
The difference in returns is striking. During the first quarter of 2021 – when EOG first started to use this new model – adjusted net income nearly tripled and the firm managed to produce a record $1.1 billion in free cash flows. These gains have continued, with the company reporting a record adjusted net income and another all-time high in free cash flow in Q3 2021.
Investors have been the ones to benefit, with EOG boosting its dividend twice this year and declaring a big $3.00 per share special dividend.
With crude oil prices still riding well above breakeven points for its model, EOG should continue to be one of the best energy stocks for investors in the new year.
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Marathon PetroleumGetty Images
Market value: $42.0 billionDividend yield: 3.4%Analysts’ opinion: 8 Strong Buy, 8 Buy, 2 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus recommendation: 1.67 (Buy)Like the aforementioned Phillips 66, Marathon Petroleum (MPC, $68.24) is also a refiner of crude oil. In this case, MPC is the largest domestic independent refiner of crude oil, with 16 refineries across the U.S.
This position has provided MPC with a steady base of earnings since its spinoff from exploration and production firm Marathon Oil (MRO) back in 2011. Those earnings have improved as gasoline demand has moved higher in recent quarters, with MPC reporting adjusted earnings of 73 cents per share in its third quarter, compared to a loss of $1.00 per share the year prior.
The growth story for Marathon comes on several fronts. For one thing, MPLX (MPLX) – MPC’s master limited partnership – continues to see growth and makes sense from a tax perspective for the firm. With its focus on natural gas processing and gathering in key regions, MPLX is still paying plenty of dividends back in MPC. In fact, MPC received $829 billion in cash from its MLP last quarter.
Secondly, MPC continues to benefit from its cost-lowering program. The firm has managed to reduce its average refining costs by about a buck per barrel over the last two years. Those are significant savings that go a long way to help improve the company’s profits. Thanks to those cost savings and overall higher demand, adjusted EBITDA at its refining operations improved by roughly $440 million sequentially in Q3.
Finally, MPC’s sale of its Speedway convenience-store chain last year provided the company with plenty of extra cash on its balance sheet. The firm still has about $10.1 billion in leftover proceeds to spend, which it plans to use on extra buybacks, reducing its debt load and padding its dividend.
This combination of growth and stability makes MPC one of the best energy stocks to buy for 2022.
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ConocoPhillipsGetty Images
Market value: $99.8 billionDividend yield: 2.0%Analysts’ opinion: 17 Strong Buy, 8 Buy, 4 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus recommendation: 1.55 (Buy)ConocoPhillips (COP, $75.65) took its lumps earlier than its fellow energy stocks and now it is reaping the rewards.
Back when oil prices crashed in 2014-2015, COP was the first major oil producer to get “lean and mean.” That meant slashing its dividend, selling underperforming assets, living within its cash flows and focusing on low-cost shale assets.
As a result, Conoco has been able to navigate subsequent oil crashes and downturns with relative ease – including in 2020. While COP did lose money along with the rest of the energy industry, it was still able to keep its dividend going through operating cash flows. In fact, it even hiked its quarterly dividend payment by 2.4% in October 2020.
Flash forward to today.
With energy prices rising, COP has continued to be quite successful in the current environment. The firm reported Q3 2021 earnings of $2.4 billion, or $1.78 per share, and more than $2.8 billion in free cash flows.
Even better is that Conoco has managed to take advantage of other energy stocks misfortunes to better itself. For instance, in late 2021, COP used its cash on hand to buy all of Royal Dutch Shell’s (RDS.A) Permian Basin assets, which included around 225,000 net acres and producing properties and 600 miles of operated crude, gas and water pipelines and infrastructure.
ConocoPhillips is well-positioned in the new year to take full advantage of the high-oil-price environment. The company estimates that based on current oil prices, it should be able to give back nearly $7 billion to investors through dividends, share repurchases and special distributions. That’s about 16% more than it handed back to investors in 2021.
Analysts are certainly upbeat about the appeal of COP. “We believe the new framework gives most investors what they have been asking for by delivering minimal production growth, a solid base dividend, strong share repurchases and opportunistic variable dividends,” say Truist Securities analysts Neal Dingmann and Jordan Levy, who rate the stock a Buy.
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Devon EnergyGetty Images
Market value: $31.6 billionDividend yield: 0.9%Analysts’ opinion: 20 Strong Buy, 7 Buy, 5 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus recommendation: 1.53 (Buy)After natural gas cratered back in the late aughts, Devon Energy (DVN, $46.61) has been off the radar of many investors. But in that time, DVN has transformed itself from being a nearly 100% natural gas focused energy stock into one with plenty of diversification in its portfolio.
As of the fourth quarter of 2020, the firm cranks out approximately 300,000 barrels of oil, 25,000 barrels of natural gas liquids (NGLs) and around 920 million cubic feet of natural gas per day. And DVN’s earnings are now split roughly 50-50 between crude oil and natural gas/NGLs production.
This diversification has helped Devon ride the waves in the energy market over the last few years. Plus, DVN has a breakeven point of $30 per barrel and $2.50 per MMBtu. With oil prices well above that, Devon is a profit and cash flow machine.
Because of the jump in crude oil prices, Devon has managed to produce nearly eight times the amount of free cash flows than it did at the end of 2020. With that, it’s also managed to increase its dividend nearly 71% since the start of this year.
Those gains should continue in the new year as well. Devon estimates that, with oil at $80 per barrel, it should be able to produce a free cash flow yield of around 18% from its drilling activities. This should give it between $4.5 billion and $6 billion in free cash flows to hand out to investors – a greater than 40% improvement over 2020’s numbers.
Thanks to its base plus variable dividend model, that extra cash should flow right into investors pockets through buybacks and special dividends. And again, oil would need to crash to $30 per barrel for investors to start to worry about the base dividend payment.
But they probably don’t have to worry. DVN is one of the best energy stocks for 2022 because it features plenty of liquidity on its balance sheet and low near-term debt.
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Chesapeake EnergyGetty Images
Market value: $7.6 billionDividend yield: 2.6%Analysts’ opinion: 8 Strong Buy, 2 Buy, 1 Hold, 0 Sell, 0 Strong SellAnalysts’ consensus recommendation: 1.36 (Strong Buy)Chesapeake Energy (CHK, $65.19) has had its fair share of drama over the years. From secret hedge funds to lawsuits to a bankruptcy, the company has seen a lot. But like a phoenix rising from the ashes, CHK is nothing like its former self. In fact, it’s pretty darn good.
After emerging from bankruptcy protection in early 2021 and shedding its huge debt burden, CHK is now a “lean and mean” energy firm, getting back to basics with its acreage and drilling plans.
This means focusing on prolific natural gas plays like the Haynesville and Marcellus shales. All in all, Chesapeake has roughly 960,000 net acres in these two core fields alone. And with its recent acquisition of Vine Energy, CHK will be the biggest producer in Haynesville by far. Given the shale field’s location to the Gulf Coast, as well as its refiners and new liquefied natural gas terminals, this is a big win for CHK.
It’s a big win for shareholders too.
As it has shed its debt and become stronger, Chesapeake has become an earnings and cash generation machine. In the third quarter of 2021, CHK managed to post adjusted net income of $269 million, or $2.38 per share. Free cash flow clocked in at $265 million for the quarter as well.
Considering the company’s former bankruptcy and prior financial condition, this is a major turning point. This continued strength prompted the firm to boost its quarterly dividend payout by 27% and unveil plans to incorporate a variable return program, beginning in March of this year, that will result in an additional dividend payment.
UBS Global Research analyst Lloyd Byrne (Buy) believes Chesapeake should be able to produce nearly $6 billion in free cash flows from 2022 to 2025. He also expects 60% of that to be returned to investors based on its new dividend model.
With a forward P/E of just 6.5x, a healthy 2.6% dividend yield and plenty of potential, it’s easy to see why CHK is one of the best energy stocks to buy for 2022 and beyond.