Oil stocks have been rallying since the start of the year in anticipation of a recovery in global economic activity. As a result, the Dow Jones U.S. Oil & Gas Index is up a healthy 35%, while the S&P 500 is up about 12%. Hence, oil stocks remain one of the more robust pandemic recovery plays with plenty of room left to run. However, not every oil stock has the same potential, and the sector faces long-term headwinds, which many consider having been exacerbated by the pandemic.
Covid-19 brought trade, travel and consumer spending to a virtual standstill last year. With the lockdown restrictions in place, oil demand plummeted worldwide. Consequently, the punditry has started to believe that the crisis has opened our eyes to the idea of a world without fossil fuels.
However, the reality is that the oil supply remains in abundance, and the technology needed to extract it continues to improve. Moreover, it continues to be remarkably economical to use and produce in comparison to renewable energies. Therefore, oil stocks aren’t going anywhere, and the list below represents the cream of the crop.
- Devon Energy (NYSE:DVN)
- Enbridge (NYSE:ENB)
- DHT Holdings (NYSE:DHT)
- ConocoPhillips (NYSE:COP)
- Diamondback Energy (NASDAQ:FANG)
- Phillips 66 (NYSE:PSX)
- Frontline Ltd (NYSE:FRO)
Oil Stocks: Devon Energy (DVN)
Devon Energy is a mid-size pure-play energy company involved in the production, development and production of natural gas and oil in the U.S. The company was founded in 1971 with 3,942 gross wells across the country. It has an incredible portfolio of assets at this time, with efficient operations, a robust balance sheet and an attractive valuation, making it a fantastic investment at this time.
The company has a well-distributed portfolio of assets with continued margin expansions and growth. Particularly in the Delaware Basin and Anadarko Basin, it owns 400 thousand net acres and 300 thousand net acres, respectively. Moreover, it expects to generate higher FCF yields with the higher crude oil prices, somewhere between 13.5% and 22.5%. Additionally, it has $1.9 billion in cash and is focused on a $1.5 billion debt reduction program this year. Therefore, DVN stock is in a strong position to continue its rally this year and provide solid shareholder returns.
Oil Stocks: Enbridge (ENB)
Enbridge is a Canadian energy infrastructure company with high-quality assets and one of the strongest dividend portfolios in the sector. It currently has a forward dividend yield of 7.2% with a payout of over $2.70 on a payout ratio of 125%. Moreover, it is also one of the most profitable mid-stream companies in the industry, with a forward EBITDA growth of roughly 8%. Additionally, ENB stock has been building up a great head of steam generating over 25% in the past six months.
One of the key issues facing Enbridge is its tussle with Michigan State on its Line 5 pipeline. However, given the lengthy litigation process in the U.S., it might take years to be a conclusive outcome. Till then, the pipeline will continue generating substantial revenue for the company and expand its margins. With the rising oil prices, GDP, and forward commitments, I expect Enbridge to remain a key player in the oil and gas sector for years to come.
Oil Stocks: DHT Holdings (DHT)
DHT Holdings is a Bermuda-based company with an international fleet consisting of 27 crude oil tankers. Its fleet has an average age of 9.4 years and operates its tankers mainly in Monaco, Singapore and Norway. Moreover, it boasts one of the strongest fundamentals in the industry, marked by robust free cash flows, EBITDA margins, and asset growth. Hence DHT stock is one of the best-performing stocks in the sector.
DHT’s revenues were volatile in the past year due to the unfavorable trading environment. However, that is likely to change this year with the rising crude oil prices. Additionally, the company has done incredibly well to reduce its interest expenses and debt in the past year, which will boost its profitability as we advance. Moreover, it also has a superb dividend profile, with a trailing 12.42% annual yield.
Oil Stocks: ConocoPhillips (COP)
ConocoPhillips is U.S. based crude oil producer with operations in over 15 countries. In addition to crude oil, it is also a producer of bitumen, natural gas, natural gas liquids and liquefied natural gas. Last year, the company made some major acquisitions, which will expand its revenue base and asset values as we advance. Moreover, COP stock’s six-month returns are at an impeccable 28%.
First-quarter results for the company were stellar, with revenues at $9.83 billion, growing by roughly 60% on a year-over-year basis. Moreover, its GAAP EPS of 75 cents comfortably beat estimates by 32 cents. Additionally, its acquisition of Concho Resources will bring in 319,000 BOEPD of production in the coming quarters. Conoco plans to sell its stake in Cenovus Energy at the end of 2022 to fund its incremental share repurchases.
Hence, with an impressive portfolio of assets, COP stock has a great growth runway ahead of it.
Diamondback Energy (FANG)
Diamondback Energy is a company engaged in producing and exploring crude oil and natural gas, specifically in the Permian Basin in West Texas. As of December last year, it had an acreage position in roughly 449,642 gross acres in the Permian Basin. Over the past few months, it has been very active in building its asset base in the Permian Basin. These developments have paid dividends for FANG stock, as it’s generated a stunning 74.62% return for its shareholders in the past six months.
Diamondback recently announced the closure of its deal to acquire QEP resources and Guidon Operating LLC. Both the deals will lead to the consolidation of Diamondback’s assets in the Midland Basin, along with massive cash and G&A savings. In addition, oil production is likely to increase in line with the increase in prices this year. Therefore, the company has an outstanding forward revenue growth rate of over 10.8%, which is way ahead of its peers.
Phillips 66 (PSX)
Phillips 66 is a U.S.-based energy manufacturing and logistics corporation. It has four key segments: midstream, chemicals, refining and marketing and specialties. So naturally, its businesses suffered a lot due to the pandemic but is likely to pick up the pace as we get closer to post-pandemic normality.
Results in the first quarter have already shown signs of improvement, aided by stronger refining margins. The rise in demand for travel led to a substantial increase in fuel prices during the quarter. As we progress, the rising fuel prices will continue to play a major factor in improving free cash flow numbers.
The company expects to generate $4.1 billion in free cash flows this year, with a $1.7 billion reduction in capital expenditures. Hence, it will have sufficient dividend coverage this year, with a much higher yield.
Frontline Ltd (FRO)
Frontline is a crude oil shipping company that operated 68 vessels as of December last year. It’s a leader in its sector and operates the most modern fleet in the industry, with an aggregate capacity of roughly 12.5 million deadweight tonnage. The company has been resilient in the wake of the pandemic, unlike the rest of the fossil fuel industry, but lost its way in its most recent quarter. However, with multiple tailwinds in place, FRO stock is likely to mount a comeback.
Oil demand is likely to pick up this year, which is why the forward revenue growth estimates for the company are at an impeccable 7.3%. Additionally, its forward EBITDA growth is also estimated at a healthy 5.7%. Moreover, the company is expanding its asset base. For example, it recently bought six large crude oil vessels worth $565 million under development in South Korea. Additionally, its liquidity position is relatively strong, allowing it to traverse the rough seas at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.