Fund manager 'couldn't be more bullish' on these three U.S. energy stocks

Published Fri, Aug 27 202112:04 AM EDTUpdated Fri, Aug 27 20212:03 AM EDT

Energy stocks offer investors a unique opportunity right now, according to Cole Smead, president of Smead Capital Management, who named his top three U.S. oil and gas companies. Smead told CNBC's "Squawk Box Europe" on Thursday that his firm "couldn't be more bullish" on the energy sector. It comes after a rollercoaster ride for energy stocks following the onset of the Covid-19 pandemic. Big Oil companies were hit on all sides as the pandemic coincided with falling commodity prices, evaporating profits, unprecedented write-downs and tens of thousands of job cuts. Last spring, balance sheets, cash flows and earnings among major oil and gas companies were frighteningly weak, according to Smead. Now, he said political and macroeconomic factors were converging in their favor. As a result, Smead's portfolio is currently "five or six times" overweight in S & P 500 energy stocks compared to the index average. Smead said his three favorite stocks were Continental Resources , the fund's largest holding, along with ConocoPhillips and Chevron , which he suggested are entering "such a strong era." "If you wanted to imagine my excitement on the subject, just imagine Matthew McConoughey squawking and pounding his chest, only I'm staring at Continental Resources while I do it," he said. Smead said the growing political focus on climate change was putting pressure on these companies to refocus on green alternatives in order to survive. BP , for example, is attempting an overhaul of its business to reach net zero carbon emissions by 2050. While BHP , the world's largest miner, is r eportedly considering a multibillion dollar exit from its oil and gas business in favor of clean alternatives following pressure from shareholders, according to Bloomberg News. The potential for companies with such a substantial presence to dominate the future energy landscape is one that excites Smead. What's more, markets are overestimating the speed of decline of the oil industry, he said. "The nice thing that remains … is there's just no new competition and people think the decline of the business is going to be way quicker," he added. "We're sitting at $70 oil. People did not think that we'd be here — just like people did not think we would be talking about [monetary] tightening 60 days ago either." The combination of a historic undersupply of oil, furthered by OPEC+ decisions to cut production during the pandemic and the green energy revolution, mean the industry is in something of a sweet spot, Smead argued. Oil prices had been rising again this week before stalling slightly on Thursday. International benchmark Brent Crude was trading around $71 per barrel and U.S. West Texas Intermediate crude futures over $67.50 around lunchtime Thursday. Smead added that investors had a unique opportunity to buy asset-related stocks such as oil and gas companies, which could end up serving as a hedge against macroeconomic downturns. "If inflation or those kinds of problems rear their head, you have these assets and you still have no competition in these spaces, and you're waking up to higher prices to replace those assets," Smead said.

Employees torque a pipe at a wedge well at Christina Lake, a situ oil production facility half owned by Cenovus Energy and ConocoPhillips, in Conklin, Alberta, Canada.

Brent Lewin | Bloomberg | Getty Images

Energy stocks offer investors a unique opportunity right now, according to Cole Smead, president of Smead Capital Management, who named his top three U.S. oil and gas companies.