What happened
Oil and gas prices were scorching hot in January. Crude oil surged 17% last month, closing at around $90 a barrel, driven in part by concerns that Russia might invade Ukraine. Meanwhile, due to colder weather, natural gas prices gained a blistering 31% for the month.
These surging oil and gas prices drove up energy stocks last month, with most rallying double digits. Three notable names that surged in January were Occidental Petroleum (OXY -0.91%), Cheniere Energy Partners (CQP -0.14%), and TC Energy (TRP 0.17%). Here's a look at what drove their rallies and whether they have the fuel to keep going higher.
Image source: Getty Images.
So what
Shares of Occidental Petroleum were up nearly 30% last month, according to data provided by S&P Global Market Intelligence. The primary catalyst was higher oil prices. The oil and gas producer also got a boost from analysts. Several increased their price target on the company based on their view that oil prices would be higher in 2022. Citi initially increased its price target from $35 to $38 per share in early January. It subsequently bumped up its target to $40 a share a few weeks later, noting that Occidental was still trading at a 20% free cash flow yield based on its conservative view of oil prices for the year. Meanwhile, Truist saw even more upside, boosting its price target from $50 a share to $56 a share after increasing its 2022 oil price target by 10%.
However, not all analysts were bullish on Occidental last month. Wells Fargo downgraded the stock from equal weight to underweight while reducing its price target from $35 to $29 per share. The primary factor was a perceived lack of upside potential. That's due to its higher leverage compared to its peers and its willingness to increase its dividend before either growth or debt reductions. With the stock recently around $40 a share, Occidental might be running out of fuel after rallying 67% last year and another 30% in January.
Liquified natural gas (LNG) producer Cheniere Energy surged more than 16% last month. The main driver was higher natural gas prices. While Cheniere doesn't produce gas, it has some upside to higher prices from the LNG it manufactures and sells at market rates. However, it sells most of the LNG it produces under long-term fixed-rate contracts.
Because of that contract structure, analysts started to grow wary of Cheniere's valuation as it rallied last month. Goldman Sachs downgraded the LNG producer from buy to neutral while maintaining its $45 price target. It sees Cheniere as fairly valued with limited earnings growth ahead. Likewise, UBS downgraded Cheniere from buy to neutral while maintaining its $50 price target (slightly below the current price). Given its limited commodity price upside, the bank believes the market has fully valued Cheniere.
Shares of Canadian energy infrastructure giant TC Energy rallied about 10% last month. Again, the main fuel was higher energy prices. While TC Energy doesn't have much direct exposure to higher energy prices due to its contract structure, it benefits from higher prices over the long term because it drives expansion opportunities.
Analysts also grew wary of TC Energy's rising price last month. That led Canadian Imperial Bank of Commerce to lower its price target while Goldman Sachs downgraded it to neutral. The big concern is a lack of catalysts. Despite higher energy prices, TC Energy doesn't have the growth potential of some of its rivals. Because of that, analysts believe it should trade at a discount to their valuations.
Now what
The continued rally in oil and gas prices gave energy stocks more room to grow last month. However, analysts are starting to think that Occidental Petroleum, Cheniere Energy Partners, and TC Energy are running out of fuel to keep rallying. They either have a leverage problem (in Occidental's case), or less direct exposure to higher commodity prices (Cheniere and TC Energy), limiting their near-term upside potential.
Because of that, even if energy prices keep rallying, these oil and gas stocks might not have as much upside potential as other energy stocks. Given that view, investors might want to look elsewhere for oil and gas stocks if energy prices continue flying higher.
