Four favourite energy stocks to own now

Oil prices may have dropped recently but they may not stay this low, and one City analyst thinks these companies are currently worth having in your portfolio.

Energean (LSE:ENOG), Tullow Oil (LSE:TLW), Serica Energy (LSE:SQZ) and 11% yielding Diversified Energy (LSE:DEC) were today named as a City firm’s top picks amid expectations for Brent crude at $90 a barrel in 2023.

Peel Hunt’s quarterly review of UK-listed exploration and production stocks expects continued high levels of M&A activity and for shareholder distributions to remain strong.

Brent crude has fallen 25% since November as demand fears grow, but the broker believes prices will be supported by the relaxation of China lockdowns and OPEC production cuts.

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Peel Hunt points out its investment cases are compelling at conservative prices, with the broker having a longer-term projection of $65 a barrel. However, it adds that the risks are skewed to the upside as global demand is expected to grow until at least 2030 and supply will be impacted by years of under-investment and the likely loss of Russian output.

Increased volatility makes forecasting harder in UK gas, but a prudent view by Peel Hunt still sees long-term assumptions going from 55p a therm to 70p a therm. UK gas has averaged 200p a therm in the year-to-date, but with the current day-ahead level above 300p.

The biggest stock among the broker’s top picks is FTSE 250-listed Energean, which in October achieved the milestone of the first gas from its flagship Karish project in Israel.

Peel Hunt, which notes that shares trade at a 35% discount to its 2,000p target price, expects Karish will provide significant cash flows underpinned by long-term gas contracts.

Energean is due to pay a third-quarter dividend of 30 US cents a share on 30 December, kicking off a plan to return at least $1 billion (£810 million) to shareholders by 2025.

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Cash-rich North Sea explorer Serica Energy is also backed for increased returns as it benefits from historically high gas prices. Less than 20% of production in the second half of 2022 is hedged, allowing the company to secure full market prices on over 80% of its output.

It accounts for over 5% of UK’s domestic gas production, operating the Bruce, Keith and Rhum fields in the UK Northern North Sea and the Columbus field in the Central North Sea.

Serica’s shares fell earlier this month after a disappointing update on its North Eigg exploration well, while it is also subject to the UK’s increased windfall tax.

It paid an interim dividend of 8p a share on 25 November and continues to review the potential for further cash returns to shareholders including the scope for buybacks.

Peel Hunt’s production forecasts point to year-end cash increasing from £455 million in 2022 to £771 million next year. The broker has a price target of 380p, noting that Serica trades on an earnings multiple that is likely to be close to an industry-leading low.

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Diversified Energy Company, which has natural gas and oil wells in multiple regions of the US, recently announced an increased dividend to reflect a strong asset performance, higher commodity prices and consistent cash margins. This is on top of an ongoing share buyback programme.

Peel Hunt has a target price of 180p and pointed out that recent updates have been strong. It added: “With low-cost and low-decline production, limited capex, and a strong hedge portfolio, Diversified’s 11% dividend yield is underpinned by one of the sector’s lowest-risk free cash flow profiles.”

Tullow Oil shares currently trade at a 55% discount to Peel Hunt’s target price of 80p, having fallen from 48.6p in mid-November to 36p today.

The West Africa-focused company, which recently failed to complete a merger with Capricorn Energy (LSE:CNE), has impressed Peel Hunt with its operational performance this year as it sets about generating cash to bring down debt and invest in growing production.

The broker said: “We support Tullow's strategy to concentrate capital expenditure monetising the high-quality and early-life Ghana fields. There is a huge prize here, we value the Ghana 2C resource at about 160p.”

Peel Hunt says its modelling shows the strategy will see Tullow reach $3 billion (£2.4 billion)  net cash by 2030, meaning the stock now presents a “clear debt-to equity play”.