The Mizuho U.S. Oil & Gas team unveiled today its 2024 outlook, acknowledging the constructive micro fundamentals within the industry encompassing capital efficiencies, well productivity, cash returns, and M&A activities.
However, a cloud of macro headwinds prompts caution, leading to an expectation of oil and natural gas prices trading within relatively tight ranges, tempering overall enthusiasm. Consequently, the team advocates a defensive stock selection approach for the sector in the coming year.
Their Top Picks for defensive stock selection in 2024 include Chevron Corporation (NYSE:CVX), Contura Energy, Inc. (CTRA), and Civitas Resources, Inc. (CIVI).
Reflecting on the past year's projections, Mizuho anticipated the sector's undervalued cash generation potential would outperform the S&P 500. However, the sector's actual performance has lagged, returning around 5% of market cap in 3Q23 compared to approximately 7.5% in FY2022, despite WTI and Henry Hub experiencing y/y declines.
As they peer into 2024, the analysts acknowledge limited upside for global oil prices, even with OPEC+ support, while the anticipated 'call on US gas from LNG' appears deferred until 2025.
“With commodity prices likely trading sideways in 2024, we believe investors should focus on stocks that can create their own catalyst - either through the asset base or through extraordinarily low balance sheet leverage,” the analysts wrote.
Cautious about the sector's dynamics, they downgrade eight stocks while upgrading three, including. The downgrade list includes ExxonMobil (NYSE:XOM), Occidental Petroleum (NYSE:OXY), Southwestern Energy (NYSE:SWN), Comstock Resources (NYSE:CRK), Antero Resources (NYSE:AR), Gulfport Energy (GPOR), Callon Petroleum (NYSE:CPE), and ChargePoint Holdings (CRGY).
On the positive side, Civitas, PBF Energy (NYSE:PBF), and CNX Resources (NYSE:CNX) see upgrades. Chesapeake Energy (CHK) and Ventana Exploration & Production (VTLE) are reinstated at Neutral.