The energy sector lags the S&P 500 in 2023, and the International Energy Agency expects weak global oil demand in 2024. Oil and gas prices have declined recently, but WTI crude remains up more than 64% overall over the past three years.
Stocks that are highly correlated to oil prices still generate huge free cash flows. However, high correlation with crude oil can be a double-edged sword, as many energy investors experienced when crude oil prices collapsed in 2020. Here are seven Morgan Stanley overweight stocks that have historically had high correlation with WTI crude oil prices:
Implied upside from December 15 closing price
Targa Resources Corp. (ticker: TRGP)
Schlumberger Ltd. (SLB)
Halliburton Co. (HAL)
Baker Hughes Co. (BKR)
Devon Energy Corp. (DVN)
Marathon Petroleum Corp. (MPC)
Targa Resources Corp. (TRGP)
Targa Resources is an American midstream logistics company that specializes in onshore natural gas and natural gas liquids, or NGLs. Analyst Robert Cadd says Targa is benefiting from a continued recovery and stabilization of gas production from the Permian Basin. Kad says Targa’s dividend cut of almost 90% in 2020 and capital spending cuts have helped the company transition to generating positive free cash flow and reduce its debt burden as energy prices recover in the coming years years. Targa also intends to raise its 2024 dividend by an impressive 50%. Morgan Stanley has an “overweight” rating and a $114 target price on TRGP shares, which closed at $85.41 on December 15th.
Schlumberger is one of the world’s leading oilfield service companies. Analyst Daniel Kutz says the market has high expectations for Schlumberger given how good the company’s services portfolio looks for this point in the energy market cycle. Fortunately, Kutz says Schlumberger’s third-quarter performance and 2024 guidance have lived up to those lofty expectations. He says Schlumberger is a great way for investors to take advantage of the recovery in prices and increased activity in international oil markets and predicts the Middle East will be a key driver of growth. Morgan Stanley has an “overweight” rating and a $62 price target on shares of SLB, which closed at $52.19 on Dec. 15.
Halliburton is a leading oil services company in the United States. Kutz says Halliburton’s third-quarter results and 2024 guidance were slightly better than expected thanks to the strength of the company’s North American business. Although the stock was penalized for weak international growth numbers, Kutz says the company’s guidance for double-digit international revenue growth in 2024 is solid and may even turn out to be overly conservative. At its current valuation, Kutz says investors are underestimating Halliburton’s commitment to capital discipline and free cash flow potential. Morgan Stanley has an “overweight” rating and a $45 target price on HAL shares, which closed at $35.82 on Dec. 15.
ConocoPhillips is one of the world’s largest independent oil and gas exploration and production companies. Analyst Devin McDermott says ConocoPhillips is ideally positioned for sustained outperformance given the company’s investment discipline and high-quality portfolio of low-cost assets. McDermott says ConocoPhillips delivers consistent returns to shareholders and generates significant free cash flow. ConocoPhillips expects about $11 billion in shareholder returns in 2024, which translates to about an 8% total cash return at $80 WTI prices. McDermott says ConocoPhillips provides exposure to rising oil prices with limited downside risk. Morgan Stanley has an “overweight” rating and a $125 target price on COP stock, which closed at $114.54 on December 15th.
Baker Hughes is an American oil services company that provides equipment and technology to the energy sector. Kutz says Baker Hughes’ total orders and free cash flow significantly beat expectations in the third quarter. The company has guided for fiscal 2023 international growth in the mid-teens and North American growth in the mid- to high-single digits. Kutz says Baker Hughes’ upstream business has benefited enormously from the recovery in oil market activity since the pandemic, and the company’s heavy international market exposure has also been positive. Morgan Stanley has an “overweight” rating and a $40 target price on BKR stock, which closed at $33.58 on December 15th.
Devon Energy is one of America’s largest independent oil and gas exploration and production companies. Deteriorating well performance and disappointing production have weighed on Devon shares in 2023. Its share price has underperformed peers by about 20% year-to-date, and the 2023 decline of more than 20% is the worst performance from all stocks on this list. However, the pullback in Devon’s share price has lifted its dividend yield to 6.4%, the highest level on this list. McDermott says management is taking proactive steps to address Devon’s issues in 2023. Morgan Stanley has an “overweight” rating and a $52 price target on DVN shares, which closed at $44.87 on Dec. 15.
Marathon Petroleum Corp. (MPC)
Marathon Petroleum is an independent refiner and marketer of petroleum products focused on the Midwest, West Coast and Gulf Coast regions. Including dividends, Marathon shares are up 30.5% year-to-date through Dec. 15, the best performance of 2023 of any stock on this list. Even after the impressive rally, analyst Joe Laetsch says there’s more upside potential for Marathon in 2024. Laetsch says Marathon’s refining and productivity margins surprised to increase in the third quarter, and $13 billion in cash of Marathon also create the potential for significant shareholder returns. Morgan Stanley has an “overweight” rating and a $160 target price on shares of MOC, which closed at $148.38 on December 15th.