Energy equities will only get better in 2022

A professional investor tells us where he’d put his money. This week: Jonathan Waghorn of Guinness Global Investors picks three top oil stocks

Oil prices have risen over the last few months. Global demand is rebounding strongly, following the worst of the pandemic, and is expected to reach new highs later in 2022. The Organisation of the Petroleum Exporting Countries (Opec) cartel has been adding supply back into the market in a cautious fashion – its aim being to keep global oil reserves under control while achieving a price that satisfies the fiscal needs of its members.

Elsewhere in the world, a lack of investment in new oil supply is beginning to show up, with no major oil developments starting up this year. Natural gas has become front page news, with a perfect storm of supply and demand events driving European and Asian prices to record levels.

Rising oil and gas prices have created a positive backdrop for energy equities.

The sector performed strongly in 2021, but valuations remain subdued relative to our long-term oil price and earnings expectations. In particular, we are seeing the emergence of much stronger free cashflow yields in the sector, a result of higher revenues and better spending discipline by the companies in question.

Our Guinness Global Energy fund invests worldwide in companies across the oil and gas sector. This includes the large integrated oil and gas majors, smaller and mid-sized oil producers, refiners, and pipeline and energy services companies.

Catching up with the market

In common with other oil and gas supermajors around the world, BP (LSE: BP) has lagged broader equity markets for several years. In addition to navigating a period of depressed commodity prices, the company has been dealing with the aftermath of the

Gulf of Mexico oil spill in 2010. Today, BP has reshaped itself and now has one of the industry’s strongest pipelines of new oil and gas projects, has improved the profitability of its existing production assets, and is showing some leadership in its de-carbonisation strategy. The company’s dividend yield is currently just over 4%, but this has room to rise, since its free cashflow yield is expected to be over 10% this year.

Higher oil prices, higher dividends

Pioneer Natural Resources (NYSE: PXD) is a US-based oil and gas producer, with a focus on shale oil production in the Permian Basin in Texas. We believe that the company owns one of the highest quality asset bases in the shale oil industry, with a deep inventory of undeveloped acreage. Pioneer is also demonstrating growing shareholder friendliness, shifting its ambitions away from production growth and towards higher shareholder returns. In particular, we like Pioneer’s recent adoption of a variable dividend structure, which returns excess profits to shareholders in sync with

the oil price cycle.

Nordic powerhouse

Equinor (Oslo: EQNR), previously known as Statoil, is Norway’s statecontrolled energy major. The company has grown its oil production well over the past couple of years, thanks to the successful development of its Johan Sverdrup oil field. In addition, Equinor is responsible for supplying a high proportion of Europe’s natural gas imports, so it’s enjoying the benefit of higher prices. We expect Equinor to increase production this year, to help alleviate the worst of the gas price spike, but we still expect gas prices to settle at a level that supports strong earnings growth for the company in 2022.

“Rising oil and gas prices created a positive backdrop for energy equities”