Based on recent experience, the aviation sector will suffer greatly from travel restrictions to prevent the spread of the highly transmissible Covid-19 Omicron variant. As airlines are huge consumers of fossil fuels, this will reduce demand for oil in the short-term.
However, pent-up demand for oil will likely increase the longer people are unable to travel long distances for vacation. Add to that the reluctance of the major oil-producing countries to further increase crude oil production according to OPEC and Russia's July 18 meeting, oil prices should be set to rise again once this latest wave of the pandemic begins to recede.
Only time will tell if these forecasts are right or wrong, but based on these projections, it is reasonable to expect a higher per-barrel price for oil in the coming months. In light of this, investors may want to consider global oil producers, especially those with greater operating profitability, to take maximum advantage of the projected oil price hike.
One of my top picks in this space is Japanese fossil fuel exploration and production company Inpex Corporation (IPXHY, Financial). As a measure of its remarkable profitability, the company has a 12-month operating margin of 44.3% against the industry median of approximately 4.3%, ranking better than 91.55% of the 1,006 oil and gas exploration companies and producers.
Using some of its proven reserves totaling approximately 2,700 million barrels of crude oil, condensate and liquefied petroleum gas plus 5,586 billion cubic feet of natural gas, the company managed to earn $4.13 billion in operating profit from $9.23 billion in total revenues in the past year through Sept. 30.
The location of the company's production in non-OPEC countries, where governments aim to reduce inflation through adequate energy policies, allows Inpex to offset the lower throughput due to the unwillingness of OPEC countries to bring more barrels to the market for global energy needs.
Even in a tough geopolitical context like the current one, Inpex remains a well-run company, as a diversified asset portfolio that will ensure that the expected rise in oil prices will not be missed. To take advantage of this, Inpex needs resources. Although it is not the best from a financial strength standpoint, the balance sheet seems to guarantee sufficient financial means for continuing operations.
The balance sheet is highly leveraged with total debt close to $11 billion as of Sept. 30, while the Altman Z score of 1.52 indicates some sort of financial instability. However, investors should not worry too much about this, in my view, as the interest coverage ratio of 33.23 shows that Inpex is more than capable of generating the money to meet payments on its debt.
The stock trades around $8.85 as of the writing of this article. The stock has a market cap of $12.41 billion, a price-earnings ratio of 9.8 versus the industry median of 13.07 and a price-book ratio of 0.49 versus the industry median of 1.29. The share price has grown more than 67% in the past year but its shares are still far from overbought levels as the 14-day relative strength index stands at 56.
The stock price is not cheap compared to the last 200-day period. The 50-day moving average value is $8.48 and the 200-day moving average value is $7.55. However, when the company's future prospects are taken into account, I believe this stock appears to have many features of an attractive investment opportunity.
Inpex Corporation pays semi-annual dividends. The last payment of $0.182 per share was made on Sept. 16, 2021, for a forward dividend of $0.29 yielding 3.29% as of the writing of this article. In addition, if the price of oil rises and the company benefits, the balance sheet is on track to improve, with the company aiming for a dividend hike if things go well enough.
On Wall Street, the stock has a median recommendation rating of buy and an average target price of around $11.40 per share.
