Energy stocks have emerged winners in this period of volatility and historically high inflation, reporting record profits and boosting shareholder returns as oil prices have surged.
But all good things must come to an end, and for investors the key question is when to start retreating. For Evercore ISI analyst Stephen Richardson, that time may be nearing.
"Cyclical investors are always mindful of a peak (in any form) and apparent from our bottom's up work is how industry margins are set to compress from here without further commodity support," he wrote in a research note Tuesday.
The backdrop for energy stocks remains solid, Richardson added, but the industry will soon have to navigate higher operating costs, capital expenditure inflation, cash taxes, and the eventual deflation of gas prices -- and investors should be prepared.
In his view, Exxon Mobil is a good bet to play as the macroeconomic environment shifts toward these trends. The analyst upgraded the stock to Outperform from In-Line, and raised his price target to $120 from $88. Richardson's upgrade stems from what he sees as a discounted valuation compared to historical levels, as well as sustainable long-term earnings growth fueled by a diversified portfolio and cost reductions. Short-term catalysts include upwards revisions to earnings estimates and record-defining margins.
But while Richardson is all in on Exxon, he's "taking some chips off the table" for Devon Energy and Occidental Petroleum. The analyst downgraded both stocks to In-Line from Outperform, citing concerns over slowing cash distribution momentum and free cash flow.
"We have no fundamental issues with DVN and/or OXY but acknowledge that just about everything that could go right for these names over the last 12 months did, and our Bull case theses have largely played out," he wrote.
He maintained his price targets for Devon and Occidental at $80 and $74, respectively. The analyst acknowledged his call could be "overly cautious and early," but added he would rather be early than late.