G7 member countries continue to tighten sanctions against Russia over aggression toward Ukraine, which is pushing up commodity prices, especially oil. At the time of writing, Brent oil futures for May are up 4.5% at $118 a barrel, while West Texas Intermediate futures for April are trading at around $115 a barrel, up 4%.
Most Western economies who import fossil fuels fear retaliation from the OPEC alliance, which could potentially lead to a contraction in oil supply (this is planned to increase by just 400,000 barrels per day in April). The organization, whose other members include Iran, the United Arab Emirates and Venezuela, criticized the G7's wave of sanctions against Russia on Wednesday.
The International Energy Agency's decision to release 60 million barrels creates additional upward pressure on the price per barrel as the adoption of the resolution follows a warning of a serious threat to global energy security.
On the one hand, the increase in oil prices is worrying investors as it could lead to a sharper rise in interest rates than originally assumed to combat the resulting higher inflation, thereby significantly increasing the risk of stagflation. On the other hand, they are trying to take advantage of the current energy crisis, which is known to bode well for oil company financial statements for the coming quarters.
As the commodity trades higher and higher, it may set the stage for a potential share price upturn.
In the energy sector, my pick is Magnolia Oil & Gas Corp. (MGY, Financial). The Houston-based oil and gas producer has a strong focus on generating significant free cash flow from a production of around 66,000 barrels of oil equivalent per day.
Cash flow should allocate to the same projects that have already propelled the stock price higher over the past year. Therefore, it can be assumed the trend will continue in the coming weeks as long as commodity prices rise.
The benign fossil fuel pricing environment allows Magnolia Oil & Gas to keep capital expenditures well below a specific level (approximately 55%) of Ebitdax (earnings before interest, taxes, depreciation, amortization and exploration expense). This is a valuation metric used by investors in assessing oil and gas companies' ability to generate operating income and to repay all liabilities.
So following the economic principle of highest return with least use of inputs, the company can target strong full-year production increases in the range of 7% to 9% growth per year while large amounts of cash flow can be set aside to fund stock price accretive strategies.
These consist of the acquisition of productive mineral properties, the repurchase of stock and additional increases to the semi-annual dividend following the 150% increase to 20 cents per share paid on March 1. As of the time of writing, the semi-annual payment leads to a forward dividend yield of 1.75%, beating the S&P 500’s yield of 1.38%.
Shares were around $22.90 in early trading on Thursday for a market cap of $5.19 billion, an enterprise value-Ebitda ratio of 6.45 and a 52-week range of $10.29 to $23.40.
The stock is not cheap as its share price is above the 50-day moving average of $20.75 and above the 200-day moving average of $17.72. However, given the growth potential defined by the company's efficient operations and benign energy environment, the stock is worth a closer look.
The 14-day relative strength index stands at 63, suggesting that despite an impressive growth of more than 90% over the past year, the stock is still far from overbought levels.
According to Wall Street analysts, the stock has a median recommendation rating of overweight with an average target price of $23.77 per share.
