Oil Can Stay Hot, but Some Stocks May Be Overcooked, Bank of America Says


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Most analysts have made up their minds about oil prices.

There is a growing consensus that Brent crude, the global benchmark, is likely to average at least $60 a barrel for the foreseeable future, and companies will finally earn profits that have eluded them for years. But some of this bounty has already been baked into the stocks, and Bank of America analyst Doug Leggate thinks it is time to pull back on certain names.

On Monday, the recent oil rally took a pause: Brent futures were down 1.4%, to $68.23 a barrel, and West Texas Intermediate futures were down 1.5%, to $64.62 a barrel.

Bank of America thinks $60 oil is here to stay, because OPEC is ready to defend that price with aggressive production cuts, and shale producers in the U.S. have also curbed production. Last year, when oil traded in the $20s and $30s for much of the year, a $60 baseline price seemed unthinkable.

The oil surge is obviously bullish for oil companies, and the bank increased its price targets on oil stocks by an average of 17%. Still, some of those stocks have already run up so much that they no longer look like bargains. The SPDR S&P Oil & Gas Exploration & Production exchange-traded fund (ticker: XOP) is already up 53% this year.

Leggate lowered his ratings on ConocoPhillips (COP), EOG Resources (EOG), Cimarex Energy (XEC), and Continental Resources (CLR) to Neutral “despite free cash yields that support greater return of cash to shareholders, but where the value of unlevered free cash flow net of debt suggests upside is more limited versus the broader sector.” In short, he sees better opportunities elsewhere. Continental, for instance, is already up 75% this year.

His top ideas are Exxon Mobil (XOM), because of its strong dividend yield (now 5.8%); Hess (HES) and APA (APA) for their oil exploration potential; and Pioneer Natural Resources (PXD) and Devon Energy (DVN), after those companies have bought other shale producers at market lows.

His top U.S. pick is Occidental Petroleum (OXY), which fought through a particularly difficult 2020 after loading up on debt to buy competitor Anadarko Petroleum. His price target for Occidental is $40. The stock was down 6% on Monday to $28.80.

Source: Marketwatch.com