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Wall Street’s Favorite Oil Stocks for 2022—Including an Obscure One

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Several analysts and strategists expect energy stocks to outperform the broader market in 2022, as they did in 2021. Energy tends to do well in inflationary environments, and oil and gas stocks in particular have been laggards for so long that they may be due for a prolonged comeback. Investors are already making big bets on oil prices to rise.

Mark Haefele, chief investment officer for global wealth management at UBS, noted on Wednesday that the stocks in the industry have lagged oil prices, so they still have room to rise. “The MSCI World Energy Index’s 2021 rise of 35% lagged the 50% oil price rally, and we expect a catch-up this year,” he wrote.

Analysts have been sending out notes with their top oil and gas picks for 2022. Several of them highlight stocks with strong free cash flow. Others see a rebound coming for oil and gas service stocks, which have struggled in recent years as producers cut back on spending.

Among the stocks receiving the most positive attention is midsize Denver producer Ovintiv (OVV), whose strong cash flow prospects could give it an edge. Ovintiv stock has doubled in the past year, trading at a recent $39, but some on Wall Street think its rally is just getting started.

Truist analyst Neal Dingmann says investors should consider a “barbell approach” with two baskets of stocks—buying large high-quality names that offer strong dividends and buybacks, while also buying small-cap stocks with attractive valuations. His favorite big names include Coterra Energy (CTRA), Diamondback Energy (FANG), and Marathon Oil (MRO). Smaller stocks he likes include Earthstone Energy (ESTE), Northern Oil & Gas (NOG), Ovintiv, and Ranger Oil (ROCC). And he picks two “story” stocks: APA (APA) and Occidental Petroleum (OXY).

Bank of America analyst Doug Leggate also likes Occidental, Apache, and Ovintiv, along with Hess (HES), because investors will begin to take notice of improvements at those companies and their valuations could improve. For Occidental, that includes possible shareholder returns after years of debt issues. He also likes Exxon Mobil (XOM), given “renewed confidence in its dividend outlook.”

In a separate note, Bank of America analyst Chase Mulvehill wrote that oilfield services stocks are “returning from the abyss” as U.S. producers in particular spend more on drilling. His top stocks for 2022 include Halliburton (HAL), Patterson-UTI Energy (PTEN), Nextier Oilfield Solutions (NEX), and Cactus (WHD).

At Citigroup, analyst Scott Gruber’s top North American oil and gas equipment and services stock is Houston company NOV (NOV).

Ovintiv also made the list of top picks at UBS, where analyst Lloyd Byrne praised the company’s improving shareholder payouts. His other picks include Chesapeake Energy (CHK), Pioneer Natural Resources (PXD), ConocoPhillips (COP), Cenovus Energy (CVE), Suncor Energy (SU), Chevron (CVX), Phillips 66 (PSX), and Baker Hughes (BKR).

Tudor Pickering Holt analysts prefer Cenovus and Devon Energy (DVN), “given massive free cash flow and accelerating capital returns” while Targa Resources (TRGP) “takes our top slot in the midstream group as return of capital shifts from a debt to equity focus.” They recommend Phillips 66 in refining and Baker Hughes in oilfield services “given peer leading capital returns.”

Morgan Stanley’s Devin McDermott, like some other analysts, is recommending investors focus on stocks with more “liquid exposure” over gas. Natural gas prices soared in 2021, and have stayed high, but could be more volatile than oil this year. He also likes companies generating cash and those with enough scale to absorb inflationary pressures. Among his favorite names are Apache, ConocoPhillips, Occidental and Ovintiv. “On the gas side, we continue to prefer EQT (EQT) over peers,” he wrote.

Write to Avi Salzman at avi.salzman@barrons.com

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