ONEOK Inc. (OKE, Financial) and Callon Petroleum Co (CPE, Financial) have underperformed the broader market recently. They are also in financial distress, as represented by low Altman Z-Scores, meaning that they could go bankrupt within the next couple of years.
Nonetheless, their ability to generate profits seems to be very good, as signaled by GuruFocus profitability ratings of at least 7 out of 10. These stocks also received positive recommendation ratings on Wall Street, which means sell-side analysts believe these companies have the potential to continue growing their stock prices, though investors should be on guard in case things start to get worse.
The first stock to consider is ONEOK Inc. (OKE, Financial), a Tulsa, Oklahoma-based owner and operator of fossil fuel transmission, processing and storage infrastructure for the distribution and marketing of natural gas and liquefied natural gas (NGL) in the Mid-Continent and Rocky Mountain regions of the U.S.
The stock has declined 1.5% over the past three months, underperforming the S&P Oil & Gas Equipment & Services Select Industry by nearly 20%, for a market capitalization of $30.11 billion and a 52-week range of $48.51 to $75.07.
An Altman Z score of 2.12 combined with a debt-equity ratio of 2.3 (vs. the industry median of 0.49) suggests the company is in some form of financial stress, and while it is able to pay interest costs on outstanding debt for the time being, the burden is not negligible. The current situation implies a low risk of bankruptcy should the market situation significantly worsen.
GuruFocus has assigned a rating of 7 out of 10 to the company's profitability, driven by an operating margin of 13.79% versus the industry median of 5.84% and a return on equity (ROE) ratio of 25.18% versus the industry median of 5.01%.
Currently, ONEOK Inc. is paying a quarterly dividend of 93.5 cents per common share, with May 16 being the date of the most recent payment. As of June 2, the dividend yield was 5.55%.
Sell-side analysts have established an average target price of $72.22 per share, which represents a 7.13% upside from Thursday’s closing price of $67.41 per share. On Wall Street, the stock has two strong buys, two buys and 12 hold recommendation ratings.
It is highly possible that the infrastructures of ONEOK will have to support a higher demand for natural gas over the upcoming months, which, coupled with a persistently high price per cubic meter, will reflect positively on the balance sheet.
To prevent European demand for U.S. gas from unbalancing the domestic supply system, the company could be encouraged to increase the capacity of its gas operations in several U.S. states.
Aside from Finland, Bulgaria and Poland, other European countries could see their supplies of Russian gas dwindle if Russia takes steps against the sixth package of sanctions the EU has recently approved.
Callon Petroleum Co
The second stock to consider is Callon Petroleum Co (CPE, Financial), an independent oil and natural gas operator based in Houston, Texas. This company is currently developing oil and gas commodities in the Permian Basin of western Texas in the United States. The company operates on total proven reserves accounting for approximately 485 million barrels of oil equivalent.
The stock has dropped 4% over the past three months, underperforming the S&P Oil & Gas Exploration & Production Select Industry by nearly 40%, for a market capitalization of $3.54 billion and a 52-week range of $25.32 to $66.48.
An Altman Z-Score of 0.65 combined with a debt-to-equity ratio of 1.37 (versus the industry median of 0.49) suggests the company is in financial distress. Also, while it can afford a significant amount of debt, the possibility of bankruptcy within a few years cannot be ruled out if profitability flags.
GuruFocus has assigned a rating of 8 out of 10 for the company's profitability, driven by an operating margin of 53.44% versus the industry median of 5.84% and a return on equity (ROE) ratio of 38.89% versus the industry median of 5.01%.
The company does not pay dividends.
Sell-side analysts have established an average target price of $83.38 per share, which represents a 45.3% upside from Thursday’s closing price of $57.39 per share. On Wall Street, the stock has nine strong buys, 13 buys and three hold recommendation ratings.
The company will benefit from high oil and gas prices as these are likely to trade even higher in the coming months due to the current macroeconomic conditions. The European Union's (EU) decision to impose an embargo on Russian maritime oil shipments is one of those factors that typically exert significant upward pressure on the price per barrel.
The OPEC+ deal to increase daily oil production by 648,000 barrels in July and August, reached on June 2, won't do much to mitigate the effects of the embargo on oil prices. In fact, this annoucement was followed with Brent Oil futures maturing in August 2022 rising 3.57% to $117.61 a barrel, while West Texas Intermediate (WTI) crude oil futures maturing in July 2022 rose 1.4% to $116.87 a barrel.