Energy Sector Rebalances Towards Gas, Occidental Petroleum Upgraded Amidst Consolidation

Market Overview: Energy Sector Shifts Focus

U.S. equities saw a strategic rebalancing within the energy sector, as Wall Street analysts signaled a renewed focus on traditional energy, particularly natural gas, amidst ongoing dealmaking and consolidation. This shift was underscored by significant analyst upgrades for Occidental Petroleum (OXY), indicating a broader pivot in capital allocation within the Energy Sector (XLE).

Occidental Petroleum's Strategic Re-evaluation

Occidental Petroleum (OXY) experienced a modest rebound of 1.5% in trading, following a 7% decline in the previous session, catalyzed by dual analyst upgrades. Mizuho analyst Nitin Kumar elevated OXY from "Neutral" to "Outperform" and increased the price target from $58 to $60. This decision was primarily driven by the $9.7 billion divestiture of OxyChem to Berkshire Hathaway, a move Kumar stated "unfetters the balance sheet," providing enhanced financial flexibility to concentrate on core oil and gas operations. Scotiabank analyst Samantha Hoh also upgraded OXY from "Hold" to "Buy," raising her price target from $48 to $55. Hoh projects the sale will accelerate debt retirement and significantly advance share buybacks. She estimates Occidental could repurchase approximately 99 million shares, representing about 10% of its outstanding shares, and still accumulate sufficient cash before planned preferred equity redemption in August 2029. Analysts viewed the recent decline in Occidental's shares as a "great buying opportunity."

Natural Gas: A Growing Demand Catalyst

The energy sector's pivot is largely underpinned by robust natural gas fundamentals. Mizuho Americas managing director Nitin Kumar noted this shift, leading to the Occidental Petroleum upgrade. The Energy Select Sector SPDR Fund (XLE) surged over 9% in the first quarter of 2025, outperforming the S&P 500 which declined nearly 9% from its 52-week high. This outperformance is attributed to stable oil and gas prices, new liquefied natural gas (LNG) projects, and potential peaks in U.S. oil production.

Natural gas prices are projected to rise significantly. BofA Securities analysts anticipate prices to reach a baseline of $4.00 per MMBtu on the NYMEX in 2025, while the EIA forecasts the Henry Hub natural gas spot price to average $4.3/MMBtu in 2025, increasing to $4.6/MMBtu in 2026. In March 2025, average monthly U.S. natural gas prices surged by 175.2% year-on-year, reaching $4.13/MMBtu, fueled by expanding data center operations and strong LNG export activity. The United States Natural Gas Fund (UNG), a futures-backed ETF, rose nearly 30% in 2025, significantly outpacing the S&P 500's 4% gains. Gas-weighted producers are leading growth expectations, with exploration and production (E&P) companies anticipating 6-7% production growth over the next 12 months, compared to 4-5% for oil-weighted producers. This growth is supported by at least 3.2 bcf/d of incremental LNG export capacity expected before 2027. The U.S. remains the world's largest LNG exporter, having hit a record 88.4 million metric tonnes last year, with North America's LNG export capacity expected to double by 2028.

Contrasting Oil Market Dynamics

In contrast to the bullish outlook for natural gas, global oil markets face potential headwinds. Global oil demand is anticipated to increase over 2025-2026, though at a slower pace than the 1.1 million barrels per day (bbl/d) reported in 2024. The decision by OPEC+ to accelerate the unwinding of 2.2 million bbl/d in previous production cuts has contributed to an already oversupplied market, with surplus capacity estimated at approximately 5 million bbl/d. Consequently, inventory builds from the fourth quarter of 2025 are expected to exert downward pressure on prices. S&P Global's base-case scenario projects average Brent crude prices at $60 per barrel and West Texas Intermediate (WTI) at $55 per barrel for the remainder of 2025, with prices expected to rise in 2026 to $65 for Brent and $60 for WTI. Crude oil prices dropped to about $60 per barrel at the end of May 2025, a notable decrease from $75-78 in January, amidst global tariffs and market uncertainties.

Consolidation and Strategic M&A Activities

The broader energy, utilities, and resources sectors in 2025 are characterized by continued consolidation and strategic mergers and acquisitions (M&A). Upstream deal activity is prominent as companies aim to secure reserves and manage capital expenditures. Notable transactions include EQT Corporation's acquisition of Olympus Energy's upstream and midstream assets for $1.8 billion, positioning EQT advantageously near proposed power generation projects in the Marcellus Shale. Citadel LLC also entered the natural gas market with a $1 billion purchase of Haynesville assets. The power and utilities sector remains a significant area for infrastructure investors, largely propelled by data center growth and the urgent need for grid modernization. Utility companies in the U.S. and U.K. are actively divesting non-core gas and LNG assets, reallocating capital into electrification and digital infrastructure to address surging load growth. This strategic realignment is evident in deals like the $6.2 billion acquisition of ALLETE.

Outlook and Future Considerations

The natural gas market is expected to remain tight and volatile through late 2025 and into 2026, with the U.S. EIA projecting Henry Hub spot prices to reach $4.10/MMBtu by January 2026, averaging around $3.90/MMBtu for the year. This is driven by anticipated colder weather, robust LNG exports, and a tightening supply-demand balance. The significant increase in U.S. LNG export capacity, with major projects like Plaquemines LNG and Corpus Christi LNG Stage 3 coming fully online, will be a critical factor in the global supply picture, boosting U.S. LNG exports to over 16 Bcf/d in 2026. However, concerns about potential oversupply are emerging, with TotalEnergies CEO Patrick Pouyanne stating that the rapid buildout of planned U.S. LNG projects is accelerating "too quickly," raising questions about future market absorption. For the broader energy sector, the shift towards natural gas, coupled with ongoing consolidation, suggests a focus on resilient assets and strategic positioning to meet evolving global energy demands while navigating persistent market volatilities and geopolitical influences.