Six Powerful Energy Names That Are Fundamentally And Technically Sound

By Ajit Singh 

It should come to no shock in how high oil prices have gone this year, and just how important just one barrel of oil is to every industry. Initially, the COVID pandemic depressed energy prices in 2020 sending oil prices below zero before prices snapped back throughout 2020 and 2021 faster as supply did not keep up with demand. In October 2021 even when Omicron was thought to have a dampening effect, the demand for oil was already very high which started to cause a strain for consumers. The Biden administration in November released fifty million barrels of oil from the nation’s strategic reserves, but that did not make any meaningful impact. Moreover, the supply chain bottlenecks certainly did not help as oil is used in over six thousand products that are produced daily. Further, the Russia-Ukraine tensions caused the near time spike in oil reaching ~$130brl before retreating. 

As energy prices around the World have risen, there are still plenty of headwinds that can drive the entire energy complex much higher. For example, the Russian-Ukraine tensions are not going to be easing anytime soon. With the West putting various sanctions on Russia and importing of Russian oil, that will cause massive disruptions as Russia has seven percent of the World’s supply of oil while the U.S. and European Union are both importers. In order for domestic oil and gas companies to pump more takes an average of eight to twelve months from the time it is started. Furthermore, for those in the EU whose main energy trading partner was Russia, and now have barred the imports of Russian oil, structuring and negotiating new deals with regional partners and set up transportation whether through various pipelines or trucks will also take some time.

Nonetheless, the energy sector will be a key focus for investors for the upcoming one to two years. Analyzing the strongest companies fundamentally and the having right technical setups are crucial in making good returns. Below are six companies that have the strongest fundamentals in the energy sector: Conoco Philips COP, EOG Resources EOG, Devon Resources DVN, Diamondback Energy FANG, APA Corporation APA, Magellan Midstream Partners L.P. MMP with the following strong fundamental criteria: 

Market Cap > $10Bn; 

Revenue Growth > 15%; 

EBIT Margin > 25%; 

ROE > 10%; 

ROA > 10%; 

FCF Yield > 5%; 

Current Ratio > 1.

Further, companies with strong dividends and dividend payout ratios along with the potential for margin expansion going forward were also key criteria. 

Technically Speaking:

Taking a look at the price action of Crude Oil as of late a 50% Fibonacci retracement has occurred on the daily chart from the breakout in late December 2021. The 61.8% Fibonacci extension would represent a double top, and if price was to eclipse that level due to the strong global demand (without OPEC increasing supplies), then the potential for other key Fibonacci extension ratios getting hit get a higher probability assigned to them. A textbook ABCD harmonic pattern is up to the 127.2% extension after a pullback which would represent a ~$173 price per barrel of WTI Crude. Nonetheless, there are a lot of factors at play, but they’re all for the price of Crude going higher over the year with minor pullbacks along the way. 

It should be no surprise that the energy sector has outperformed the broader market given where oil prices have gone. However, an ABCD pattern has recently completed hence, a broader pullback is expected. Further, the 20p SMA and the 200p SMA have greatly diverged hence, another warning sign that the near-term trend may be taking a breather. 

Taking a look at the oil services ($OIH) and oil exploration and production ($XOP) ETFs in comparison with the broader energy sector ETF ($XLE), they have all performed in lock step. But the run up may come to a halt in the near term before potentially picking up steam later. 

Below are the individual name charts that are analyzed on an Elliot Wave basis. The early moves have already been made, and the moving averages have also diverged from one another. But in each case if the wave structure holds true, a pullback has a high probability of leading to a higher wave, and thus higher prices later in the year.  

Conoco Philips – Weekly Chart

EOG Resources – Weekly Chart

Devon Energy – Weekly Chart 

Diamondback Energy – Daily Chart

Apache Corp – Weekly Chart

Magellan Midstream Partners L.P. – Weekly Charts

Overall, a lot of investors both on the retail and institutional side didn’t position well for such a shock in higher energy prices. In the case for the overall energy industry and specific names mentioned, a lot of the moves have been made, but the potential for further upside can be there given the sanctions on Russian oil, and if OPEC decides to do anything with supply constraints are still there. A pullback from the sharp rise over the past three months would be healthy and help with setting up good positioning going forward.