PXD

Publicly traded companies mentioned herein: Chevron Corp (CVX), EOG Resources Inc (EOG), Exxon Mobil Corp (XOM), Pioneer Natural Resources Co (PXD) 

Highlights

The presenter is long shares of Pioneer Natural Resources Co (PXD) and EOG Resources Inc (EOG) due to his bullish outlook on the E&P sector broadly. Free cash flow yields are 9% - 10% for large-cap E&Ps and 12% - 15% for smaller E&Ps compared to 4% for the S&P 500 ex-financials. US energy companies are also extremely disciplined on capex spending and cash flow. Many of the bigger companies are raising dividends, and Chevron (CVX), Exxon (XOM) and Pioneer are all buying back stock. While EOG is not buying back stock, he expects the company to raise its dividend aggressively. Given these dynamics, he sees 20% - 25% upside from here for both PXD and EOG. 

Despite interest rates and inflation climbing, the presenter believes US consumers are in fine shape and recession risk is low. While inflation is a bad sign for the economy, it’s not bad for nominal earnings, especially in energy. 

A key to the investor’s thesis is upward revisions as a major bullish factor. The oil price used in many existing E&P models is $77 per barrel for 2022, while current strip pricing is $94. As a result, it is reasonable to expect upward revisions throughout the year.

The presenter believes energy is still vastly under-owned and under-weight by the buy side. The slowness of giant long-only funds to react to this cannot be understated. The ESG stigma is so big for the long-only funds when it comes to buying these stocks, but the upward revisions will be too difficult to ignore.

The now urgent question around US energy security is another major factor that should help these stocks. US producers have been sticking with production growth targets of 0% - 5% for this year, but if they raise that back to 5% - 8% production growth, investors should expect even more upward revisions coming.