By: Avi Salzman – Barrons – Oil and gas companies could face more stringent regulations under Democratic control of the White House and Congress. But analysts remain confident about their prospects, as political shifts often result in surprising changes.
In fact, President-elect Joe Biden’s victory has coincided with a runup in prices even though he is considered to be less of a friend to the industry than a Republican administration would have been.
Truist analyst Neal Dingmann found six stocks he calls “Democrat Darlings” that could do especially well in the next year—both because they can handle any new regulatory requirements, and because their core businesses are set up well to generate cash in the current environment.
His favorite stocks for the coming political shift include several stocks whose free cash flow is likely to grow considerably at higher oil prices. They also tend to have relatively low debt. These “Democrat Darlings” include Apache (ticker: APA), Devon Energy (DVN), Diamondback Energy (FANG), EOG Resources (EOG), Marathon Oil (MRO), and Penn Virginia (PVAC).
Dingmann wrote that the most likely changes to come out of Congress and the Biden White House are limits on drilling on federal land and tax increases. Biden has said he wants to raise corporate taxes, reversing about half of the cuts that President Trump and Republicans made in 2017.
Democrats could also change tax rules targeted at oil and gas names, including amending a break that allows companies to deduct most of the cost of drilling new wells, known as intangible drilling costs. Biden could delay or stop new pipelines as well, after the Trump administration had eased their regulatory path.
For oil companies, several of those changes could pinch profits and future growth. But Dingmann noted that most oil and gas companies did so poorly in the last few years that they’ll be able to carry forward considerable net operating losses, and potentially pay “little cash taxes in the coming years,” he wrote.
Biden has also called for an end to new permits on federal land. In anticipation, producers filed permits for new leases in a rush last year, with nearly 3,800 being approved in the second half of the year, Dingmann noted. Those permits tend to last for several years, so the companies could be insulated from changes in the near term. EOG, for example, has high exposure to federal land, but got 620 federal permit approvals in the second half of last year, the most of any operator. The fourth quarter permit haul was the largest of the Trump years, he wrote.
EOG shares were up 2.4% around midday Thursday, while the S&P 500 was up 0.2%. Apache stock gained 4.9%, Devon shares advanced 6.2%, Diamondback rose 2.2%, Marathon Oil rallied 8.3%, and Penn Virginia gained 3.1%.