Better times may be ahead for energy investors after this year’s declines opened major investment opportunities, and oil prices rebound. West Texas Intermediate futures are down about 7% in 2023. That would mark the commodity’s first annual decline since 2020, when it fell more than 20%. Those declines come amid record U.S. production. The domestic oil industry is pumping more than 13 million barrels a day, gaining market share and putting pressure OPEC and its allies — which are cutting supply to balance the influx. This production frenzy is happening as domestic producers aim to cash in on the oil-rich Permian Basin. Deals this year totaled $180 billion, the highest value in more than a decade, according to Morgan Stanley. But roaring growth has put the U.S. oil sector in something of a bind as breakneck production collides with a weakening economy in China, depressing crude prices. Energy stocks, in turn, have languished the broader market. The sector is down about 3% year to date, while the S & P 500 has soared 24%. But there is opportunity in the sector’s pullback, according to Morgan Stanley analyst Devon McDermott and others on the Street, as crude is primed to bounce back in the new year. Take a look at where analysts and industry leaders see oil going in the new year, and how investors can capitalize. Back to $80 U.S crude? Morgan Stanley and Occidental Petroleum CEO Vicki Hollub see U.S. crude averaging $80 a barrel in 2024 as the market comes into balance. U.S. crude has fallen about $21 per barrel since reaching its September highs, as traders have issued a vote of no confidence in OPEC’s November promise to deliver supply cuts of 2.2 million barrels per day in the first quarter of 2024. The United States Oil Fund is down more than 15% over the past three months. The S & P Oil & Gas Exploration ETF has followed oil prices lower and pulled back 6% during the same period. @CL.1 @LCO.1 YTD line West Texas Intermediate and Brent prices in 2023. Hollub said the drop this year is largely due to U.S. production growth, which is expected to slow next year, helping to lift prices. “We’ve always gone back to our belief that WTI will average around $80,” Hollub told CNBC on Dec. 11. “It’s averaged $80 since 2004. We think it’ll continue to be around $80.” A sharp pullback in U.S. shale activity as prices fall should slow production growth outside OPEC to 1.4 million barrels per day in 2024, down from 2.2 million bpd in 2023, according to Morgan Stanley. Global oil demand growth, meanwhile, should slow to 1.2 million barrels per day in 2024 with OPEC’s supply cuts pushing crude markets into a deficit in the first quarter of 2024, according to the firm. If this deficit pushes U.S. crude to $80 a barrel, the basket of exploration and production stocks that Morgan Stanley covers should see a median shareholder return of 9% in 2024, according the firm. If U.S. crude pushes $100 a barrel, shareholder returns for exploration and production stocks would rise to 13%, according to Morgan Stanley. To be sure, Wells Fargo is forecasting a lower U.S. crude price at $71.50 a barrel next year. But, Morgan Stanley believes that even at $60 a barrel shareholders would still bank 6% returns. The case for Occidental McDermott sees Occidental riding oil prices higher, upgrading the stock to overweight with a price target of $68, implying 12% upside from Tuesday’s close. The analyst, who named the stock a top pick, sees Occidental yielding 8% overall in dividends and buybacks for shareholders in 2024. Occidental had fallen out of favor with investors after taking on significant debt from its acquisition of Anadarko Petroleum in 2019. The company, however, has paid down $18 billion in obligations since 2020 and further balance sheet improvement could return the stock to its “full historical premium” given its strong portfolio of assets, McDermott wrote. Hollub said Occidental is still breakeven if U.S. crude falls to $45 a barrel, providing the company with a significant cushion if crude continues to tumble. McDermott, however, is in the minority among Wall Street analysts at the moment with 56% of analysts rating Occidental as hold — apparently waiting to see how the recent CrownRock deal plays out. Occidental’s stock is down about 6% for the year. McDermott also upgraded Devon Energy to overweight with a price target $48, implying about 5% upside. Devon, though down about 26% this year, is taking steps improve its well efficiency and should deliver a 9% shareholder return in 2024 with WTI at $80 a barrel, compared to 7% among some peers, McDermott wrote. Some 66% analysts have a buy rating on Devon with an average price target of $56.29, which would deliver 23% upside from the last close. Big oil, big deals — big returns? Occidental, along with Exxon and Chevron, are chasing growth and shareholder returns through major acquisitions, part of a broader consolidation trend in the industry this year. Exxon’s stock is down about 3% since it agreed to purchase Pioneer Natural Resources for about $60 billion and 6.6% for the year, but Wall Street is bullish on the oil major overall with 62% of analysts issuing a buy rating on the company’s stock. JPMorgan sees the Pioneer deal adding high quality undrilled inventory to Exxon’s portfolio. The bank has an overweight rating on Exxon with a $127 price target, implying 19% upside. Exxon plans to increase its stock buyback program to $20 billion, a $2.5 billion increase, once the Pioneer deal closes. Chevron has struggled more than its peers with its stock down nearly 6% since it agreed to buy Hess for $53 billion. Year to date, Chevron shares are down more than 15%. Goldman Sachs said this underperformance is largely due to operational issues at its Tengiz oilfield in Kazakhstan. The investment bank thinks the oil major will rebound as it resolves the issues in Tengiz, issuing a price target of $180 — nearly 19% upside for the oil major from Monday’s close. Goldman forecasts Chevron will deliver $29 billion returns to shareholders in 2024 through buybacks and dividends with room for upside when the Hess transaction closes. Meanwhile, Occidental’s purchase of privately held CrownRock for $12 billion has raised questions over whether the company is falling into a debt trap again. Hollub told CNBC Occidental is still on track to slash its obligations below $15 billion by divesting domestic assets that aren’t core to the company’s portfolio. Warren Buffet’s Berkshire Hathaway recently gave the deal an endorsement, buying up $588 million in Occidental stock after the transaction was announced. Occidental’s shares have risen about 5.6% since the deal was announced and after the company raised its dividend to 22 cents per share from 18 cents per share. Hollub told CNBC that the CrownRock deal was not driven by the oil majors’ shopping spree. She said it is all about maximizing shareholder returns by scaling up in the oil-rich Permian Basin. “It’s the scale, it’s the inventory and all of that has helped now for us also to step up our dividend,” she said. And it’s a strategy that Morgan Stanley sees others adopting in 2024, with low financial leverage giving the industry the opportunity to shop for deals. “Over time, we would expect industry consolidation to lead to fewer but higher quality companies, a positive for the investability of the sector,” McDermott wrote.
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