JP Morgan says these 2 ‘Market Strong’ energy stocks can beat the market

JP Morgan says these 2 ‘Market Strong’ energy stocks can beat the market

We are approaching the end of the year and it is time to start deciding how to allocate the portfolio for a solid year-end return. In a recent JPMorgan note focused on the energy sector, 5-star analyst Arun Jayaram recommended oil and gas producers as likely to beat overall markets going forward.

Getting to the bottom of things quickly, Jayaram states, “We remain bullish on the longer-term story on natural gas driven by growing global demand for low-cost US gas exports.”

With that in mind, we took a closer look at two energy stocks that were endorsed by the JPM expert. In fact, Jayaram is not alone in singing the praises of these stocks. According to the TipRanks platform, they are rated as Strong Buys by the rest of the analyst community.

Permian Resources (PR)

First up is Permian Resources, a Texas-based E&P operating in the Delaware Basin. Permian was created this year through the merger transaction between Centennial Resource Development and Colgate Energy. Permian Resources emerged from this merger as the largest pure-play E&P company operating in Delaware. Permian’s producing assets include 180,000 net leasehold acres and 40,000 royalty acres. These holdings produced 137,000 barrels of oil equivalent per day, evenly split between oil and natural gas products.

Permian Resources’ assets are extremely valuable, and the company’s production translated into strong revenue and earnings in its recently reported 2Q22. The top line reached $472.7 million, more than doubling year-over-year from $232.6 million. Earnings, reported at $193.1 million, generated diluted EPS of 60 cents. That was a strong rebound from 2Q11, which posted a quarterly earnings loss of 9 cents.

This company currently operates an 8-well drilling program, but has detailed a 2023 development plan that specifies starting with 7 active rigs. Permian’s plans include improving its operating efficiency, and the company is targeting $1.1 billion to $1.3 billion in free cash flow for the full year 2023.

Jayaram, in his report on JPM, points to Permian’s free cash flow and production growth as key points for investors, saying of the company: “We expect PR to offer an attractive combination of significant cash yield coupled with diversified volume growth while trading a turn below peers at 2023 DACF and at a premium on FCF metrics. PR has set an annual core dividend of $0.20 per share and will return at least 50% of post-dividend FCF to shareholders from 2Q22.

“PR also ranks in the top quartile of our updated JPM Forced Ranker, which gives the most weight to cash flow and FCF generation, what we see as the most important metric for investors. We estimate that PR is set to return 10 % market cap for shareholders in 2023 while delivering 10% oil volume growth,” added Jayaram.

Quantifying his position, Jayaram gives PR an Overweight (i.e. Buy) rating, with a $12 price target implying ~56% upside over the next 12 months. (To watch Jayaram’s record, Click here)

Overall, Permian receives a Strong Buy consensus rating from the Street, based on 8 analyst reviews that include 7 Buys and 1 Hold. Shares are selling for $7.66 and the average target price of $10.86 suggests a 35% upside for one year. (See PR stock forecast at TipRanks)

EOG Resources (EOG)

The second stock we’ll look at, EOG, is one of the largest E&Ps in the North American hydrocarbon scene. The company has a market capitalization in excess of $71 billion and operates in some of the continent’s richest oil and gas regions. EOG has production operations in Texas, Louisiana, Oklahoma and New Mexico, in areas including the Eagle Ford, Permian, Anadarko and Barnett. The company also operates in Colorado’s DJ Basin, Wyoming’s Powder River Basin and the Williston Basin on the North Dakota-Montana border. EOG is even active in the Caribbean, with operations in the offshore Columbus Basin near the island of Trinidad.

All this has pushed EOG’s revenue to record levels. The company reported a total of $7.4 billion at the top of 2Q12, the most recently reported, after quarterly production of 920.7 MBoed. Adjusted net income for the second quarter was $1.6 billion, with adjusted EPS of $2.74. On the balance sheet, EOG reported slightly more than $5 billion in total debt and about $3 billion in cash and liquid assets.

EOG has seen 8 consecutive quarters of consecutive revenue increases. Earnings were more volatile, but second-quarter EPS rose 58% year over year.

Summing up EOG for investors, Jayaram writes, “We continue to view EOG as a long-term core holding in the space given its premium drilling strategy poised to support diversified capital returns assuming mid-cycle pricing or better. One of the key themes was the diversified performance of E&Ps that accelerate the return of cash to equity holders. Returning cash to equity holders has been more rewarded than debt reduction, which favors companies with strong balance sheets like EOG.”

The JPM analyst gives EOG an Overweight (i.e. Buy) rating, and his price target, which he set at $156, shows his confidence in a 28% upside over the next year. (To watch Jayaram’s record, Click here)

Wall Street clearly agrees with Jayaram that this stock is a Buy recommendation – the 14 analyst reviews on file include 12 Buys and 2 Holds. Shares are trading at $121.42 and the average target price of $150.29 implies ~24% upside going forward. (See EOG stock prediction on TipRanks)

To find good ideas for trading energy stocks at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that brings together all of TipRanks’ stock information.

Denial of responsibility: The views expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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