Morgan Stanley Upgrades EOG Resources, Sees Highest Returns Ahead From These Select Oil Stocks

The energy sector has been a silver lining in a brutal market in 2022, and Morgan Stanley said Wednesday there are still opportunities in the oil and gas space for selective investors.

The Analyst: Morgan Stanley analyst Devin McDermott issued the following three ratings changes:

• Upgraded EOG Resources Inc EOG from Neutral to Buy, cut price target from $149 to $147.
• Downgraded Pioneer Natural Resources Co PXD from Neutral to Underweight, cut price target from $267 to $261.
• Upgraded Continental Resources, Inc. CLR from Underweight to Neutral, raised price target from $67 to $74.

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The Thesis: In the report, McDermott said oil and gas exploration and production stocks have outperformed volatile oil prices in the last three months, and many stocks have undergone earnings multiple expansion.

McDermott said this re-rating is warranted based on the strong fundamentals in the group.

Even after their 2022 rally, McDermott said exploration and production stocks remain undervalued overall compared to both the rest of the market and their own historical valuation. As a result, he says E&P stocks remain attractive heading into the end of the year.

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In the upcoming third-quarter earnings season, McDermott said he expects E&P earnings to decline slightly compared to the second quarter but remain strong overall.

"Putting it all together, we are 2% below consensus on 3Q cash flow per share on oil-focused E&Ps (crude averaged -15% lower q/q), but a sequential increase in natural gas prices (+14% for Henry Hub) leaves us ~3% above consensus for gas E&Ps," he said.

For investors looking for shareholder returns, McDermott said he expects the highest returns from APA Corp (US) APA, Ovintiv Inc OVV and Pioneer Natural Resources.

Benzinga's Take: There's no question the future of global energy is renewables, but energy supply shortages in 2022 have highlighted just how much the world still relies on oil, coal and natural gas.

The energy sector has been the top-performing sector in the market so far in 2022, and supply challenges will likely only get worse as Europe and the rest of the world approaches the winter months.

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