After an initial bump following OPEC’s announcement that it will cut production by 2 million barrels per day, oil prices have fallen sharply due to a host of negative catalysts including a strong dollar, a hawkish Fed, soaring inflation rates and fears of a global economic downturn hitting demand. Further, there were reports that the Biden administration might soon release another 15 million barrels of crude from the Strategic Petroleum Reserve to counter OPEC’s move and tame prices.
Oil prices, however, appear on track to snap two consecutive weekly losses thanks in large part to robust crude demand and a weakening dollar. After a relentless climb that saw it hit a 20-year high against a basket of six leading currencies, the dollar has tumbled to a one-month low on hopes that the Fed will finally relent on big rate hikes. Oil rose on Thursday, extending a rally of nearly 3% in the previous session, as U.S. crude exports hit record highs.
"It appears that recession concerns have abated lately but continuously betting on healthy economic growth will prove foolhardy," Tamas Varga, an analyst at oil broker PVM, told Reuters.
While the short-term outlook for oil and gas remains cloudy, the longer-term outlook remains favorable with global energy demand set to continue growing while oil and gas will remain the world’s dominant energy sources. A report by the Energy Information Administration (EIA) estimates that global energy demand will increase 47% by 2050, as more people achieve middle class status. Natural gas in particular is expected to see growing demand as it continues to be the pre-eminent bridge fuel in the energy transition.
Here 3 some lesser-known oil and gas stocks that are set to benefit from the current market environment and are also quite popular with hedge funds.
#1. NexTier Oilfield Solutions Inc.
YTD Returns: 177.8%
Market Cap: $2.74B
Houston, Texas-based NexTier Oilfield Solutions Inc. (NYSE: NEX) is an oil exploration infrastructure firm that operates in the U.S. oil and gas fracturing segment. A total of 30 hedge funds have NEX stock in their portfolios.
NexTier reported strong Q3 2022 results on Tuesday, with Revenue of $896M good for 127.9% Y/Y growth and net income of $104.7 million ($0.42 per diluted share) a huge improvement from net loss of $44.0M reported for last year’s comparable quarter. Even better, the company issued a positive outlook for the U.S. shale industry, noting in its earnings call that while the “frac bottleneck” and the trend towards capital discipline restricting shale’s ability to “fully deliver through next year at least”, this is actually a favorable setup for shale starting in 2023”.
“The multiyear outlook has arguably never been better for U.S. land well completion fundamentals,” NEX noted.
While recession fears continue to roil markets, NEX is confident that American shale demand would still be strong.
“There are clear recessionary signals in the broader economy. And this brings obvious fears to some that near-term oil demand will succumb to macro pressures. An industry slowdown is not our base case. And given the extreme tightness that currently exists in frac even in a recession, we would expect relatively favorable U.S. frac supply demand dynamics in 2023. Further, for next year, we believe our strong downside protection would position us to continue to create value for our shareholders,” NEX said in its earnings call.
#2. Golar LNG Limited
YTD Returns: 108.3%
Market Cap: $2.90B
Golar LNG Limited (NASDAQ: GLNG), is a liquefied natural gas company that operates marine infrastructure for the liquefaction and regasification of LNG. The company is headquartered in Hamilton, Bermuda.
LNG demand has been extraordinarily strong with Europe working hard to wean itself off Russian energy commodities following the latter’s invasion of Ukraine.
According to a report by Bloomberg New energy Finance, “…the global LNG market is expected to be tight over 2022-26 as Europe’s quest to reduce its dependency on Russian gas increases demand for LNG. The ramp-up of new supply projects, especially in the US, is forecast to raise global supply to 460 million tons, up 19% from 2021. LNG demand growth is likely to be constrained by supply between 2021-26, with 18% growth estimated, although Europe is expected to see imports spike during the period.”
Golar LNG Limited also benefits from oil price increase, with its liquefaction ship under a contract that lets the company earn $3.1 million each for a $1 increase in the price of Brent crude.
#3. Comstock Resources, Inc.
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YTD Returns: 106.8%
Market Cap: $4.11B
Frisco, Texas-based Comstock Resources, Inc. (NYSE: CRK) is an independent energy company that engages in the development and production of oil and natural gas primarily in North Louisiana and East Texas in the United States.
Comstock has benefited from robust natural gas demand and tight supplies since last year. The company took advantage of high gas prices to improve its balance sheet and paid down debt aggressively offering it downside protection and ability to withstand lower prices.
Although gas prices have since declined, they are still multiples higher than their 5-year average and companies like Comstock should have little trouble continuing to expand their top- and bottom-lines.
By Alex Kimani for Oilprice.com
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