Putin Cuts Europe’s Gas Supply – Here Are 2 Actions That Could Benefit
Russia’s war on Ukraine has sparked a series of sanctions as Western powers seek to convince Russia to refrain – and counter-sanctions as Russia seeks to push back against the West. Russia and NATO are reluctant to shoot each other. But Russia has a powerful weapon of sanction on which to rely to support its policy of war.
Germany, and much of Western Europe, imports most of its natural gas from Russia – and the Russian government is turning off that tap. Russian gas exports on the main pipeline have already fallen to 40%, and the Russian government will further reduce them to 20%. Ironically, Western sanctions against Russia are contributing to the reduction, as they have made it more difficult for Russia to service and maintain the pipeline.
The immediate result of this gas sanctions battle is skyrocketing natural gas prices – globally. In this context, we used the TipRanks database to locate two natural gas stocks that are willing to take advantage of these price increases directly to share in the gains. Both are strong call options, and according to 5 Star Wall Street analysts, each has considerable upside potential. Let’s take a closer look.
Conoco Phillips (COP)
The first stock we will look at, ConocoPhillips, is one of the biggest names in the energy industry. The $116 billion company operates in 13 countries, employs more than 9,400 people and last year produced more than 1.5 million barrels of oil equivalent every day, generating annual revenues of $46 billion. This year, the company continues to post strong revenues and profits and is focusing more on natural gas.
In natural gas, in June, ConocoPhillips announced that it had taken a stake – totaling 12.5% – in the North Field LNG expansion by QatarEnergy. The move makes ConocoPhillips the third partner in the project and gives the company a foothold in Qatar’s natural gas production, which is emerging as a potential substitute for Russian fuel exports to Europe.
And earlier this month, ConocoPhillips followed up that announcement by announcing that it had signed an HOA with Sempra Infrastructure, which will enable the expansion of COP’s liquefied natural gas (LNG) business. The deal involves a large-scale investment in new LNG facilities in a multi-phase project.
On the financial side, ConocoPhillips reported net income in the first quarter of this year of $5.76 billion, or $3.27 per share in adjusted terms. This marked a dramatic increase from EPS of 69 cents recorded in the prior year quarter. Topping the list, the company generated more than $18 billion in revenue, up 79% year over year.
Of interest to defensive investors, COP also announced in its first quarter financial statement that it will increase its capital returns to shareholders this year, with a total target of $10 billion for 2022. This will include both redemptions shares and common stock dividend payments. ConocoPhillips has plenty of cash to make those returns, having reported $7 billion in operating cash in the first quarter.
Covering ConocoPhillips for Piper Sandler, 5-star analyst Ryan Todd sees new gas projects as key to the stock’s future. Listing several of the company’s natural gas initiatives, Todd writes, “ConocoPhillips has signaled a shift to a more proactive stance on global gas opportunities. Given the structural changes in global gas markets following Russia’s invasion of Ukraine and COP’s focus on efficient, low-cost supply assets, we believe the he addition of low-decline, FCF-generating assets fits perfectly into the COP project. long-term portfolio, while required capital should have a limited impact on the company’s FCF outlook over the next five years.
Consistent with these comments, Todd assesses that ConocoPhillips shares an overweight position (i.e. buy), and his price target, set at $123, suggests a one-year gain of 35%. (To see Todd’s track record, Click here)
Market giants have always captured the attention of Wall Street, and ConocoPhillips, with 12 recent analyst reviews, is no exception. These reviews break down 11 to 1 in favor of buys over hold and support the consensus strong buy rating on the stock. The shares are trading at $91.09 and their average price target of $128.67 implies a one-year upside potential of 41%. (See COP stock forecast on TipRanks)
Chesapeake Energy (CHK)
Based in Oklahoma, with easy access to the Texas oil patch, Chesapeake Energy is an $11.7 billion hydrocarbon explorer and developer with assets in some of the richest producing areas of Texas, Louisiana and Pennsylvania. The company’s leases cover some 1.6 million acres, primarily in natural gas fields.
Although Chesapeake Energy does not bring in the high revenue levels of large corporations, it has generated strong cash flow from its operations. In 1Q22, the most recent report, CHK reported adjusted net income of $436 million, or $3.09 per share, up 14% year-over-year. The company’s cash flow generated net cash of $853 million, including $532 million of free cash flow. This FCF was a quarterly record for Chesapeake.
Strong earnings and cash flow supported a solid dividend, a boon for investors. Chesapeake declared a first-quarter payout of 50 cents per common share, plus a variable dividend of $1.84, bringing the total payout to $2.34. The regular dividend alone gives a yield of 2.1%, which is in line with market averages; with the variable added, the div payout returned 4.1%.
These financials were in turn supported by strong production and rising gasoline prices. Chesapeake drills in rich oil and gas deposits, but natural gas is the company’s primary product. The first quarter saw a net production rate of approximately 620,000 barrels of oil equivalent per day, 87% of which was natural gas. The rest was composed of both gaseous liquids and crude oil. The company has developed this production from 13 rigs operating 41 active wells on its leased acres.
In his coverage of Chesapeake, 5-star Wells Fargo analyst Nitin Kumar writes, “CHK has significantly underperformed its gas peers year-to-date, up about 18% from the gas group. up around 42%, despite a leading cash yield framework. We favor CHK’s strong balance sheet, deep drilling inventory and proximity to the Gulf Coast LNG export corridor, which should continue to generate leading sustainable FCF returns in the gas sector.
Kumar adds an overweight (i.e. buy) note to his commentary and completes his position with a price target of $130, indicating confidence in a 41% upside for the next 12 months. (To see Kumar’s track record, Click here)
Overall, CHK has captured the attention of equity professionals on Wall Street – 7 so far reviewed CHK shares, earning it 6 Buys and 1 Hold for a Strong Buy consensus rating. The stock’s average price target of $120.29 and trading price of $92.19 combine to imply about 30% year-over-year upside potential for the stock. (See CHK stock forecast on TipRanks)
To find great ideas for energy stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a recently launched tool that brings together all of TipRanks’ stock information.
Disclaimer: The views expressed in this article are solely those of the analysts featured. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.