Crude oil prices hit their highest point in nearly three years on Tuesday as global demand rebounds and supply remains tight.
Gas Over Oil: Mulvehill has a somewhat mixed outlook for the midstream oil and gas group as a whole, suggesting stock selection is important at this point.
“FCF is inflecting across the sector and FCF yields look attractive – but a lot of companies do face a backdrop where their underlying midstream markets are fundamentally oversupplied,” he wrote in a note.
Given the current industry backdrop, Mulvehill said he prefers stocks that are more heavily exposed to natural gas and natural gas liquids (NGL) over stocks that are more exposed to oil and refined products. He said rising U.S. LNG export capacity will be a major driver of long-term U.S. natural gas demand.
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How To Play It: Bank of America is expecting global oil, natural gas and NGL production to each grow between 4% and 6% annually over the next three years. However, Mulvehill said the only U.S. basin that will generate meaningful growth over that time will be the Permian.
Mulvehill is bullish on Targa because of the company’s integrated ‘well-head to water’ NGL platform and its exposure to the Permian basin. He said Energy Transfer has a diversified portfolio, improving cash flow and high exposure to NGL exports.
Mulvehill has a Buy rating and $62 price target for Targa and a Buy rating and $14 price target for Energy Transfer.
Benzinga’s Take: The oil and gas industry is in a tricky spot given most industry experts don’t expect the world to hit peak oil demand for roughly another decade. But valuations could remain pressured in that time as investors look to the extremely far long term and a shift in the global energy market to renewable sources.