Crude prices continue to be exceptionally volatile towards the upside as traders try and gauge the operational capacity of ports after Russian sanctions have forced supply-chain alterations. Many may be wondering whether the oil stocks’ prices will continue on their current trajectory or if investors have gotten ahead of themselves. Well, the way I’m viewing it is that Russian sanctions will hold for the foreseeable future while demand continues to outpace supply. As short-term interest rates remain unchanged and pandemic lockdown restrictions get voided; I really can’t see prices drawing down within the next year — if I’m being honest.
How could this benefit U.S. companies? So, Russia supplies 12% of the world’s oil, including crude, light, and sweet oil. Therefore, a significant adjustment for the world to cope without its supply, but nobody said it can’t be done. But there’s a host of American companies that have the capacity to fill the void.
Here are the oil stocks that I think will benefit the most from the current climate.
Oil Stocks to Buy: Devon Energy (DVN)
Devon Energy is an S&P 500 stock and one of the companies with the greatest exposure to the Permian Basin in Texas. The stock has surged by nearly 80% during the past year as the firm has managed to leverage the global reliance on oil and gas from the Permian. Devon’s market stronghold has allowed it to operate at a breakeven price of approximately $30 per barrel, which means that crude oil price will need to capitulate beyond imagination for the firm not to be profitable.
DVN stock is undervalued, with its forward price to earnings ratio (10.04x) trading at a 5-year discount while its PEG ratio (0.84) is still below the 1.00 value threshold, meaning that the market hasn’t fully priced in the company’s earnings growth as yet.
Matador Resources (MTDR)
This stock is catered towards the investor who enjoys living life on the edge. Matador Resources has a beta of 4.06X, meaning that its stock is 4.06 times as risky as the S&P 500, which could bring with it proliferated upsides in a bull market as well as exacerbated downsides in a bear market.
I see scope for gains in Matador’s case. The firm has expanded its midstream operations emphatically with its strategic joint venture with San Mateo midstream yielding significant results. During the full year of 2021, San Mateo contributed a record $154 million in EBITDA, which is a 37% year-over-year gain. In addition to its San Mateo involvement, Matador has strengthened its presence in the Delaware Basin by investing $513 million in drilling, completing, and equipping rigs; Matador’s expected to yield impressive results from its recent investments as the firm’s Capex per foot decreasing by 21% and its EBITDA simultaneously increasing by $154 million during the past year.
All matters considered, MTDR stock is undervalued as its price to earnings ratio is trading at a 48.85% discount relative to its 5-year average. Additionally, Matador’s leverage ratio is running at 10.62X, suggesting that debt obligations are being met with relative ease, which could amplify investors’ residual value.
Oil Stocks to Buy: Diamondback Energy (FANG)
Diamondback stock has recently been a reference point to summarize energy sector health due to its close correlation with crude prices; I thus couldn’t leave it out of my list.
Last week, the company beat its fourth-quarter earnings estimates as it posted earnings per share of $3.63 while producing $772 million in free cash flow. It’s expected that Diamondback will increase its CapEx by $300 million in 2022 in a push to become a low-cost pure play. In the Delaware and Midland basins, the push is seeing it drift away from its heavy oil exploits after selling its Williston Basin assets in October last year.
I see Diamondback as one of the more efficient oil producers out there, and this can be substantiated by its EV/EBITDA ratio 0f 5.53X, which is trading at a sector discount of nearly 30%. Furthermore, the stock is undervalued with its price to earnings (11.93X) and price to sales (4.91X) ratios trading at 5-year discounts amid robust earnings yield growth of 334.4% during the past year.
On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) 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.