BofA favors defense and value in the oil and gas sector

Investing.com -- Bank of America told investors it prefers a defensive and value-oriented approach to the U.S. oil and gas sector, as the market grapples with twin economic shocks: a trade war and a supply-driven oil price decline. 

“Oil markets are on the frontlines of two economic wars,” BofA analysts wrote, citing damaged OPEC+ cohesion and weakening macro conditions.

BofA believes de-escalation is the most likely path forward on both fronts and has shifted its ratings accordingly, upgrading Diamondback (NASDAQ:FANG) Energy to Buy from Neutral and downgrading ConocoPhillips (NYSE:COP) to Neutral from Buy. 

“We recommend positioning with a combination of defense and value rather than defense in isolation,” BofA said.

The firm sees FANG as more resilient in the current environment, pointing to its “lower dividend break even ($36 WTI) and higher debt-adjusted free cash flow yield (10%),” compared to COP’s $51 and 6.0 percent, and EOG’s $49 and 6.5 percent. 

While COP and EOG hold the advantage in balance sheet strength, BofA argues this is “more relevant in a lower for longer, rather than a de-escalation case.”

BofA also sees opportunity in mid-cap names, highlighting Coterra, Devon Energy (NYSE:DVN), and Ovintiv (NYSE:OVV) as attractive combinations of value and defense.

The firm has reduced its WTI oil price forecast to $60 per barrel mid-cycle, down from $65, citing weak balances and a projected 2H25 surplus of 800,000 barrels per day. It now assumes oil will average $54 in 2Q25 and $61 by year-end. 

“Together, this reduces valuations across the oil-levered E&Ps by 25%,” BofA said.

Despite the weaker outlook, BofA expects U.S. producers to remain cautious. “We expect producers to largely adopt a wait and see approach,” with few willing to cut activity unless oil drops into the $40s.