Oil Stocks to Watch as Middle East Conflict Intensifies

Crude oil futures rose as much as 5% in the intraday session on Thursday after President Biden said his administration would support Israel strikes Iran’s oil facilities, adding that option is under discussion. Brent crude for November delivery gained 4.8% to trade at $77.44 a barrel at 12.50pm ET, while WTI crude was changing hands at $73.65 a barrel after gained 5.1%.

Citi analysts provided estimates that a major Israeli strike on Iran’s export capacity could knock 1.5 million bbl/d of crude off the market, while an attack on downstream assets and other relatively minor infrastructure such as it would be 300K-450K bbl/day. Iran’s oil output hit a six-year high of 3.7 million bbl/d in August, according to ANZ Bank.

Meanwhile, Clearview Energy Partners predicted oil prices could gain as much as $28/bbl if flows are blocked in the Strait of Hormuz; $13/bbl if Israel strikes Iranian energy infrastructure and $7/bbl if the US and its allies impose economic sanctions on Iran.

It will be interesting to see if the latest developments finally snap the oil markets out of their seemingly endless bearish stupor. As commodity analysts at Standard Chartered have noted, oil markets are going through a period of major dislocations where oil price movements are largely unlinked to fundamental changes, with market behavior in recent weeks suggesting this dislocation will continue. Oil market sentiment is exceptionally weakwith the number of short positions held by money managers in Brent futures now surpassing long positions for the first time on record.

Related: Nigeria tries to restart natural gas sector with tax cuts

Fortunately for the bulls, this trend is clearly not sustainable, with extreme positioning increasing the risk of a sudden relaxation. Here are some oil and gas stocks that have outperformed not only the energy sector, but the market overall.

#1 Targa Resources Corp. (NYSE:TRGP)

Market cap: $33.6 billion

Annual Return: 79.0%

based in Texas Targa Resources Corp. (NYSE:TRGP) owns general and limited partner interests in a limited partnership that provides natural gas and natural gas liquids services. The company gathers, compresses, treats, processes and sells natural gas. TRGP earned a buy recommendation from Goldman Sachs due to its strong return on equity (or ROE).

“Stronger-than-expected economic growth is the clearest upside risk to ROE. (This) would create an advantage for asset turnover through faster growth in sales and profit margins through operating leverage. However, stronger growth has recently coincided with hotter-than-expected inflation,” wrote GS analyst David J. Kostin. “

GS estimates that Targa Resources will be able to increase its ROE by 17% this year. TRGP has been an exceptional performer and is currently trading at a decade high of just Nvidia Corp. (NASDAQ:NVDA) with a higher return among the famous FAANG group of stocks.

#2 The Williams Companies (NYSE:WMB)

Market cap: $58.1 billion

Annual Return: 38.1%

Williams Inc. Companies (NYSE:WMB) is one of the largest energy infrastructure companies in the United States, operating a total of 33,000 miles of pipelines, which it says represents one-third of the gas transported in the US. The company posted solid results, with the recent increase in electricity demand, particularly from artificial intelligence (AI) data centers, likely to keep demand high for the company’s gas pipelines.

WMB continued to expand its gas infrastructure. At the beginning of the year, the company COMPLETED the acquisition of facilities with transport links from Hartree Partners for 1.95 billion dollars. Gas assets include six underground natural gas storage facilities in Louisiana and Mississippi with a total capacity of 115B cf, 30 pipeline interconnections to attractive markets, including connections to Transco, and 230 miles of gas transmission pipelines. Transco is the largest natural gas pipeline in the US

“Importantly, this storage will also allow us to deliver value to customers in markets with growing renewable adoption as daily natural gas peaks increase the need for storage.,” Williams president and CEO Alan Armstrong said in a press release.

#3 ONEOK Inc. (NYSE:OKE)

Market cap: $54.6 billion

Annual Return: 34.7%

based in Tulsa, Oklahoma ONEOK Inc. (NYSE: OK) is another midstream infrastructure company engaged in the processing, storage, transportation and marketing of natural gas and natural gas liquids.

Like its peers, ONEOK has sought to expand its gas assets through mergers. The company announced the acquisition of 43% of the outstanding common units of Enlink for $14.90 per unit and 100% of the interests in the managing member for $300 million, for total cash consideration of approximately $3.3 billion. The acquisition includes a crude oil infrastructure platform capable of processing 1.7 billion cubic feet per day of Permian gas and 1.6 million barrels per day of Permian crude oil gathering capacity.

Two weeks ago, Morgan Stanley upgraded OKE shares to Overweight from Equal Weight with a price target of $111, up from $103 (up 17.3%), expecting a positive estimate revision cycle in the following year. Morgan Stanley’s Devin McDermott expects the company to deliver a strong execution in growing and realizing synergies with EnLink and Medallion, following a strong execution in integrating the Magellan acquisition.

By Alex Kimani for Oilprice.com

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