Our only energy stock scores another big Wall Street upgrade. We see two paths ahead

Published Fri, Jan 5 20243:36 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Another Wall Street analyst has thrown their support behind Coterra Energy , adding to Jim Cramer's belief that the oil and gas producer is a stock to watch in the new year. Bank of America on Friday upgraded Coterra to buy from a hold-equivalent rating, becoming the fourth research firm in less than a month to turn positive on the Club holding. Within a few days of each other in December, Citi, UBS and Wells Fargo all recommended clients buy Coterra . More than 60% of analysts covering Coterra now have a buy-equivalent rating on the stock, according to FactSet. "I think Coterra is either going to get bought [by another company] or have a huge year because there are too many people who are behind for me to think there's just, like, 'Well, let's buy it for no reason,'" Jim said Friday. "People just feel like this is the year they can have the breakout." Coterra on Friday rose nearly 1% to just over $25 per share as the Club considers whether to buy more of the stock. Both oil and natural gas were up on the session. Our most recent Coterra purchase came Dec. 6 — just $25 per share, as investors dumped the stock aggressively during what proved to be a five-day losing streak. Coterra has underperformed the S & P 500 over the past six months, gaining about 1.6% compared with a nearly 6% gain for the broad U.S. stock index. The S & P 500 Energy Sector was up about 4% over the same stretch. CTRA .SPX 6M mountain Coterra versus S & P 500 over the past six months While there's no public indication that Coterra could be imminently acquired, Jim's comments reflect an awareness of the flurry of dealmaking across the energy sector in the wake of ExxonMobil 's $60 billion takeover of Pioneer Natural Resources . Weeks later, Exxon's rival oil major Chevron in October announced a plan to buy Hess for $53 billion. Meanwhile, smaller deals — such as Occidental Petroleum 's $12 billion bid for privately held CrownRock — also have transpired. The latest consolidation move came on Thursday when Apache parent APA said it planned to buy Callon Petroleum for $4.5 billion. Volatile oil and natural gas prices remain an important driver of Coterra's stock. Coterra's revenues are split roughly 50-50 between oil and natural gas. In general, the higher the commodities trade, the more money Coterra will eventually have left over to return to shareholders through stock buybacks — and, to a lesser extent, dividend payouts. Investors in the energy patch, including us at the Club, care deeply about capital returns. @CL.1 @NG.1 6M mountain Oil versus natural gas over the past six months Crude prices have been in the low-to-mid $70s per barrel since early December, a far cry from the more-than-$90 a barrel levels seen in late September. However, mounting tensions in the Middle East — amid the ongoing Israel-Hamas war and, more recently, shipping attacks in the Red Sea — have emerged as a key factor that could push oil higher. After falling by more than a third between the start of November and mid-December, natural gas prices have started to drift higher. On Friday, U.S. natural gas traded around $2.84 per million British thermal units, up about 20% from its recent low on Dec. 12. A warm winter so far in the Northern Hemisphere has crimped demand for natural gas needed to heat homes and other buildings, weighing on the commodity's price. To be sure, investors in exploration-and-production companies like Coterra pay attention to more than just the day-to-day fluctuations in crude and natural gas prices. Analysts, including those at Bank of America, have touted Coterra's improving well productivity as a reason to like the stock. In its upgrade, Bofa also said Coterra's strong balance sheet is a positive differentiator, making the stock a bit more defensive compared to oil-and-gas-producing peers who carry higher debt loads. Cost savings for Coterra's drilling operations could prove to be another tailwind for its stock this year. The company has estimated about 5% deflation in 2024, which, if it comes to pass, could help keep capital expenditures restrained, leaving more money available to return to shareholders. The eventual refilling of the U.S. Strategic Petroleum Reserve, which the Biden administration drained to combat surging energy prices tied to Russia's invasion of Ukraine in 2022, and the rise in liquified natural gas exports expected in 2025 represent two additional long-term factors to consider. (Jim Cramer's Charitable Trust is long CTRA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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An oil tank and an oil pumpjack are pictured in the Permian basin, Loco Hills regions, New Mexico, U.S., April 6, 2023.

Liz Hampton | Reuters

Another Wall Street analyst has thrown their support behind Coterra Energy, adding to Jim Cramer's belief that the oil and gas producer is a stock to watch in the new year.