Oil Stocks To Watch As Middle East Conflict Intensifies
Alex Kimani

Crude oil futures surged as much as 5% in Thursday’s intraday session after President Biden said his administration would support Israel striking Iran's oil facilities, adding that the option is being discussed. Brent crude for November delivery gained 4.8% to trade at $77.44 per barrel at 12.50 pm ET while WTI crude was changing hands at $73.65 per barrel after gaining 5.1%.

Citi analysts have provided estimates that a major strike by Israel on Iran's export capacity could take 1.5M bbl/day of crude off the market, while an attack on downstream assets and other relatively minor infrastructure such as could take out 300K-450K bbl/day. According to ANZ Bank, Iran's oil output hit a six-year high of 3.7M bbl/day in August.

Meanwhile, Clearview Energy Partners has predicted that oil prices could gain as much as $28/bbl if flows are blocked in the Strait of Hormuz; $13/bbl if Israel strikes Iranian energy infrastructure and $7/bbl if the U.S. and its allies placed economic sanctions on Iran.

It will be interesting to see if the latest developments will finally snap oil markets out of their seemingly never-ending bearish stupor. As commodity analysts at Standard Chartered have noted, oil markets are going through a period of major dislocations wherein oil price movements are largely unrelated to changes in fundamentals, with market behavior over the past few weeks suggesting this dislocation is likely to continue. Oil market sentiment is exceptionally weak, with the number of short positions held by money managers in Brent futures now exceeding the number of longs for the first time on record.

Luckily for the bulls, this trend clearly is not sustainable, with the extreme positioning raising the risk of a sharp unwind. Here are some oil and gas stocks that have been outperforming not only the energy sector but the market in general.

#1 Targa Resources Corp. (NYSE:TRGP)

Market Cap: $33.6B

Year-to-Date Returns: 79.0%

Texas-based Targa Resources Corp. (NYSE:TRGP) owns general and limited partner interests in a limited partnership that provides midstream natural gas and natural gas liquid services. The company gathers, compresses, treats, processes, and sells natural gas. TRGP has earned a Buy recommendation from Goldman Sachs thanks to a strong return on equity (or ROE). 

“Stronger-than-expected economic growth represents the clearest upside risk to ROE. [It] would create upside to asset turnover through faster sales growth and to profit margins through operating leverage. Stronger growth has recently coincided with hotter-than-expected inflation, however,” wrote GS analyst David J. Kostin."

GS estimates that Targa Resources will be able to grow its ROE by 17% in the current year. TRGP has been an exceptional performer and is currently trading at a decade-high with only Nvidia Corp. (NASDAQ:NVDA) boasting a higher return amongst the famous FAANG group of stocks. 

#2 The Williams Companies (NYSE:WMB)

Market Cap: $58.1B

Year-to-Date Returns: 38.1%

The Williams Companies Inc. (NYSE:WMB) is one of the largest energy infrastructure companies in the United States, operating 33,000 miles of pipelines in total, which it says account for a third of the transported gas in the U.S. The company has been posting solid results, with the recent pop in electricity demand growth, particularly from artificial intelligence (AI) data centers, likely to keep demand for the company’s gas pipelines high.

WMB has continued to expand its gas infrastructure. Earlier in the year, the company completed the purchase of facilities with transport links from Hartree Partners for $1.95 billion. The gas assets include six underground natural gas storage facilities in Louisiana and Mississippi with a total capacity of 115B cf, 30 pipeline interconnects to attractive markets including connections to Transco, and 230 miles of gas transmission pipeline. Transco is the largest U.S. natural gas transmission pipeline

"Importantly, this storage will also allow us to provide value to customers in markets with growing renewables adoption as daily peaks for natural gas increases the need for storage," Williams President and CEO Alan Armstrong said in a press release. 

#3 ONEOK Inc. (NYSE:OKE)

Market Cap: $54.6B

Year-to-Date Returns: 34.7%

Tulsa, Oklahoma-based ONEOK Inc. (NYSE:OKE) is another midstream infrastructure company that engages in the processing, storage, transportation, and marketing of natural gas and natural gas liquids. 

Similar to its peers, ONEOK has been looking to expand its gas assets through mergers. The company has announced the acquisition of 43 percent of Enlink's outstanding common units for $14.90 per unit and 100% of the interests in the managing member for $300 million, for a total cash consideration of approximately $3.3 billion. The acquisition includes a crude infrastructure platform capable of processing 1.7 billion cubic feet per day of Permian gas and 1.6 million barrels per day of Permian crude gathering capacity.

Two weeks ago, Morgan Stanley upgraded OKE shares to Overweight from Equal Weight with a $111 price target, up from $103 (17.3% upside), expecting a positive estimate revision cycle over the next year. Morgan Stanley's Devin McDermott expects the company to achieve strong execution in growth and synergy realization with EnLink and Medallion, following strong execution in integrating the Magellan acquisition.

By Alex Kimani for Oilprice.com

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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