Assets like stocks, bonds, cryptocurrencies and precious metals have been selling off in the first week of 2022, but luckily for investors in energy stocks, oil prices have been bucking the trend, up around 5% in the past five days. A major reason for this divergence is that the Federal Reserve is pivoting to a hawkish direction, which is pushing rates higher. However, economic growth continues to accelerate with expectations of 6% GDP growth in the fourth quarter and another strong figure expected in Q1, despite the recent surge in coronavirus cases.
Thus, we are seeing strength in assets that are more directly connected to the economy, like agriculture, energy and industrial metals. In terms of oil, the supply/demand dynamic remains quite favorable. On the demand side, oil demand is expected to reach 99.1 million barrels per day in 2022 which puts it at almost the same level as 2019’s 100.8 million barrels per day. On the supply side, there are some challenges due to unrest in parts of Asia and reports that OPEC+ may not be able to meet its targets for a 400,000 barrels per day scheduled increase later this month.
Given these developments, energy stocks are likely to keep outperforming in 2022. Many have very favorable valuations, and value stocks tend to outperform in environments with rising rates and growth. Therefore, investors should consider buying these undervalued energy stocks:
- TransGlobe Energy (NASDAQ:TGA)
- Apache (NASDAQ:APA)
- Ovintiv (NYSE:OVV)
Undervalued Energy Stocks: TransGlobe Energy (TGA)
TGA and its subsidiaries acquire, explore, produce, and develop crude oil and natural gas in Egypt and Canada. It holds a 100% working interest in four projects in Egypt. It also owns working interest assets in the Cardium and Ellerslie formations in the Harmattan area of Western Canada.
TGA is one of the cheapest stocks in the market with a price to free cash flow ratio under 6. While its market capitalization is around $230 million, the company is expected to generate about $100 million in cash over the next 12 months. Of course, this figure could rise if oil prices keep rising. Further, its Canadian assets are more viable with oil prices closer to $100 per barrel, given that production costs have risen in North America.
Wall Street is also high on the stock as it has a price target of $4.19, implying about 31% upside. Further, its last earnings report was very strong, with revenue growth of 243% and earnings reaching 51 cents per share, a stark improvement from a loss in the same quarter last year. For 2022, analysts are projecting 70 per share in EPS and $146 million in revenue.
Given this valuation and momentum, it’s not surprising that TGA has an overall A rating which translates to “strong buy” in our POWR Ratings system. It has strong grades across the board including a B for Growth and Value. Click here to see TGA’s complete POWR Ratings including grades for Industry, Stability, Sentiment, Momentum, and Quality.
APA through its subsidiaries explores for and produces oil and gas properties. Its operations are across the United States, Egypt, the United Kingdom, and offshore Suriname. The company also gathers and processes transmission assets in West Texas and owns four Permian-to-Gulf coast pipelines.
Over the last decade, it’s increasingly become expensive to drill for oil in North America due to environmental regulations, increased costs and a shortage of labor. Therefore, APA is in an advantageous position as it has globally diversified operations.
In its last quarter, APA’s revenue increased 83.8% year-over-year to $2.05 billion. The company’s adjusted operating cash flow increased 116% year-over-year to $866 million. Its adjusted EBITDA increased 14.5% sequentially to $1.16 billion.
Next quarter, APA’s EPS is expected to increase to $1.48 with 50% revenue growth. It also has a streak of topping EPS estimates for four straight quarters. Finally, the most compelling part about APA is its strong cash flow generation which is likely to be prioritized in an inflationary environment with rising rates.
APA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. In addition, it has an A grade for Momentum and Quality and a B grade for Growth and Value. It is ranked No. 6 in the Energy – Oil & Gas industry. To see the complete ratings for APA, click here.
Undervalued Energy Stocks: Ovintiv (OVV)
OVV is an independent oil and gas producer that explores and produces oil and natural gas in North America. Following the buyout of Newfield Exploration in 2019, OVV has become one of the more significant upstream players in the North American E&P landscape.
The company’s core assets include prime real estate in the Permian, Eagle Ford, Montney, and Duvernay resource plays. These are some of the most cost-advantaged shales in North America. They have substantial opportunities for profitable drilling at current commodity prices. Plus, the company has a massive liquidity cushion and can endure low commodity prices for a long time if needed.
OVV recently reported a strong quarter where sales and earnings rose year over year due to higher commodity price realization and successful cost-control initiatives. The company has an overall grade of B and a “buy” rating in our POWR Ratings system. OVV has a Growth Grade of B as earnings are expected to increase by 1,330% next year. Click here to see OVV’s full POWR Ratings including how it stacks up against its peers.
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