We recently compiled a list of 13 Best Natural Gas and Oil Dividend Stocks To Buy. Since APA Corporation (NASDAQ:APA) ranks higher on our list, we have analyzed the stock in detail.
Energy stocks can be hot and cold, ranging from periods of strong performance to periods of relative stagnation. These stocks attract attention from investors, particularly when oil prices surge or geopolitical tension escalates, leading to increased volatility and heightened trading activity. This is what we have seen thus far this year. Energy stocks performed well in the first four months of 2024 because of increasing oil prices. However, when oil prices began to decline in May, energy stocks also fell. The energy sector is up by nearly 7% this year so far but experienced a roughly 4% drop in the past month. As of June 7, oil prices reported their third consecutive week of decline. Investors balanced OPEC+ reassurances with recent US jobs data, which reduced the likelihood of the Federal Reserve lowering interest rates in the near future. The jobs report suggested that interest rates would remain high for an extended period, which usually reduces optimism in the oil market.
While the performance of energy stocks is influenced by oil prices to some extent, the earnings of oil refiners, storage, and transportation companies are not directly dependent on these prices, according to Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. One of the main reasons for this is that these companies mainly operate on fixed margins or fee-based structures rather than being closely linked with fluctuating prices. Here are some other comments from the analyst:
“Many exploration and production companies have productive oil wells and should be able to generate solid profit margins. Since these companies tend to return capital to shareholders in the form of dividend payouts, their stocks represent an opportunity for income-orientated investors.”
Although energy stocks experienced a rally in the initial months of the year, their behavior seems to align with past patterns, as predicted by analysts. Walter Todd, chief investment officer at Greenwood Capital Associates, said that the historical trend observed in energy stocks resembles a boom-and-bust cycle: when oil prices surge, these stocks also rise, but subsequently, a supply response triggers price declines and causes these stocks to fall. That said, US oil companies are showing greater capital discipline, resulting in higher returns and lower valuations compared to the other sectors in the market.
Though oil dominates the energy market as the largest player, natural gas also holds significant importance and plays a crucial role. It serves various purposes, including power generation, heating commercial and residential buildings, and supporting industrial activities. In addition, it is relatively inexpensive compared to other fossil fuels. Its distinctive attributes have led to an expectation of continued growth in its demand. According to a report by the International Energy Agency, global gas demand is set to increase by 2.5% in 2024, equivalent to 100 billion cubic meters (bcm). The report further mentioned that the steep decline in natural gas prices after the record highs of 2022 is contributing to the rebound in gas demand.
Many oil and gas stocks provide attractive yields, making them appealing to investors who prefer high-dividend stocks.
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Our Methodology:
For this list, we first scanned Insider Monkey’s database of 920 hedge funds, as of the first quarter of 2024. Our focus was on selecting gas and oil companies that are involved in the exploration, production, transportation, or distribution of oil and gas. From this pool of companies, we identified 13 companies that prioritize distributing dividends to their shareholders and ranked them in ascending order of the number of hedge funds having stakes in them at the end of Q1 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
APA Corporation (NASDAQ:APA)
Number of Hedge Fund Holders: 45
APA Corporation (NASDAQ:APA) is an American holding company. Its subsidiaries explore for and produce oil and natural gas in the US, Egypt, and the UK. The stock has been consistently experiencing a downward trend, falling by nearly 40% from its high in mid-2022. In the first quarter of 2024, the company reported production of 389,000 barrels of oil equivalent per day, which excludes its Egypt production. This showed a 6% decline from the same period last year. Meridian Funds highlighted some reasons for the company’s decline in its Q4 2023 investor letter.
“APA Corporation (NASDAQ:APA) is a global energy exploration and production company with operations in Egypt, the U.K., the North Sea, the U.S. Permian Basin, and Suriname, where it has made a significant oil discovery and sizeable additional discoveries are expected. We believe APA’s core global production profile is underappreciated and that the business is viewed as defensive, given its low cost to maintain and grow production. APA’s Suriname project, which is moving closer to development with partner TotalEnergies, is expected to provide differentiated low-cost production growth in two to three years as TotalEnergies is carrying the bulk of the development cost. This mix has allowed APA to otherwise aggressively allocate capital to pay down debt and increasingly focus on buying back stock as opposed to financing capital-intensive production growth. During the quarter, the stock declined as the mix of falling oil and gas prices and an announcement from TotalEnergies timed Suriname’s potential first production at the far end of estimates. We increased our holding in APA in the fourth quarter since the timing delay would not change the value we ascribe to the Suriname production. Adding to our confidence was news of the potentially increased size and amount of the first production from that region which, in our view, would more than offset the negative effect of the delay.”
We agree with the firm. The company’s debt-to-equity ratio of 1.45 appears high, which has prevented it from investing in costly production expansion. Despite this, APA Corporation (NASDAQ:APA) reported growth on various other fronts in Q1 2024. The company’s operating cash flow for the quarter came in at $368 million, up from $335 million in the prior-year period. Moreover, the ongoing strength in the Permian region pushed US oil production above expectations, marking the fifth straight quarter of meeting or surpassing projected targets. APA Corporation (NASDAQ:APA) generated $99 million in free cash flow during the quarter. Its cash flow generation provides a sense of reassurance for income investors.
APA Corporation (NASDAQ:APA) declared a quarterly dividend of $0.25 per share on May 23, which fell in line with its previous dividend. The stock’s dividend yield on June 10 came in at 3.39%. Due to its strong cash flow generation, the company was able to return $176 million to shareholders through dividends and share repurchases, which places APA on our list of the best dividend stocks from the oil and natural gas sector. According to analysts, the stock’s forward P/E multiple of 6.80x makes it a relatively cheap option. Street analysts have kept an average price target of $37.8 for APA, which shows a 30% upside potential from its current levels. We believe the best time to purchase the stock was in 2021, when it was trading at around $19 per share, coinciding with insider buying.
APA Corporation (NASDAQ:APA) was a popular buy among elite funds at the end of Q1 2024, as hedge fund positions grew to 45, from 35 in the previous quarter, as per Insider Monkey’s database. The stakes owned by these hedge funds have a collective value of nearly $340 million.
Overall, APA ranks 5th among the best natural gas and oil dividend stocks. You can visit 13 Best Natural Gas and Oil Dividend Stocks To Buy to see other dividend stocks from the natural gas and oil sectors. While we acknowledge the potential of dividend stocks, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.