1As inflation continues to rage higher, demand continues to increase and as geopolitical tensions remain high, oil prices have been climbing. In turn, this has investors wondering if there are any cheap oil stocks left to choose from.
Because oil prices have been soaring, so too have energy stocks. Many of these companies — big and small — have seen their stock prices roar higher. Despite this, many remain at reasonable valuations.
How is that possible?
For starters, these valuations were incredibly compressed due to the selloff we saw — both in energy stocks and oil prices — in 2020. Furthermore, the soaring price of oil has left many of these companies far more profitable. Now, though, oil is correcting from the highs, falling almost 30% from peak to trough. And that’s hammered some of these stocks lower.
So, with all of that in mind, here’s what we’re looking at for cheap oil stocks.
- Pioneer Natural Resources (NYSE:PXD)
- Exxon Mobil (NYSE:XOM)
- ConocoPhillips (NYSE:COP)
- Chevron (NYSE:CVX)
- Occidental Petroleum (NYSE:OXY)
- Continental Resources (NYSE:CLR)
- Magnolia Oil & Gas (NYSE:MGY)
Now, let’s dive in and take a closer look at each one.
Cheap Oil Stocks: Pioneer Natural Resources (PXD)
Pioneer Natural Resources is woefully under-followed, in my opinion. The company is sitting on some of the most prime real estate in the Permian Basin, and in my view, CEO Scott Sheffield “just gets it.”
During the company’s mid-February quarterly conference call, Sheffield explained why the company was not hedged on oil prices. Meaning, when oil was $70, $80 and even $90 a barrel, Pioneer wasn’t selling a boatload of futures contracts to lock in that price.
Even before the Eastern European turmoil occurred, he realized that oil prices were likely headed much higher.
During the conference call, Sheffield said that with oil prices above $90 a barrel, shareholders of PXD stock were looking at dividend payouts of “greater than $24 a share.” In regards to whether oil prices could easily go to $150, he said:
“Demand is stronger than it ever has been in the world and OPEC and OPEC Plus is going to run out of capacity by the end of ’22. That’s even been stated by several OPEC and OPEC plus countries. So that’s ignoring the Iran and the Ukraine situation.
…[T]here’s no reason putting on a hedge when it’s obvious that things could easily move up north…If you look at our hedge position now at 0% hedged on oil. If you’re talking about a $90 price environment, every $5 change in oil now is an incremental $750 million of cash flow for us.”
I don’t know where oil will end up, but I know that Pioneer will be minting cash as a result of the spike.
Exxon Mobil (XOM)
As the biggest energy company in the U.S., Exxon Mobil weighs in with a market capitalization of roughly $345 billion. Despite the turmoil created by the novel coronavirus pandemic, Exxon Mobil has seen a stunning rebound.
Despite the recent pullback, shares are up 150% from the low. And despite the rally, shares trade at just 13 times this year’s earnings. That’s a stunningly low valuation for the biggest stock in the leading stock-market sector.
Most industries and sectors have moved lower over the last one, three, six and 12 months. Not energy, though. It continues to boom higher as energy prices continue to climb. While bad for the consumer, it’s great for the industry’s bottom line.
Analysts expect revenue to climb almost 30% this year for Exxon, while estimates call for nearly 50% earnings growth. Furthermore, the stock pays out a 4.3% dividend yield.
Cheap Oil Stocks: ConocoPhillips (COP)
Pioneer isn’t the only one that’s not hedging in this environment. The company explained that it thinks “shareholders buy our shares because of the upside that it represents in the commodity price and the torque that we have to the upside in the way we set up the company.”
With that in mind, CEO Ryan Lance isn’t screwing around. He added that, “[ConocoPhillips prefers] to remain unhedged, and frankly, hedging would do little [to] help. So we have a very strong balance sheet, which helps us on the downside and shareholders ought to expect full exposure to the upside that we’re experiencing to date.”
Similar to Exxon, ConocoPhillips stock trades at roughly 11 times earnings, with revenue forecast to grow more than 20%, while earnings are expected to soar almost 75%.
Don’t forget, Conoco is a conglomerate. As energy prices continue to rise, so too does its potential. That opens the door for a higher stock price down the road, aided by it being one of the cheap oil stocks.
If you look at the companies that make up the Energy Select Sector SPDR ETF (NYSEARCA:XLE), you won’t find the typical diversity that you see in many other ETFs. Roughly 45% of the fund is tied up two stocks: Exxon and Chevron.
Chevron makes up a slightly bigger position, weighing in at 22.27% of the XLE, while Exxon sits at 22.22%. Either way, these two stocks make up a huge portion of the top holdings.
With Chevron commanding a $318 billion market cap, it’s no surprise either. Like its slightly-larger brethren, Chevron is classified as one of the cheap oil stocks as shares traded at just 17 times earnings. It also pays out a 3.5% dividend yield.
Moreover, analysts expect 24% and 52% revenue and earnings growth this year, respectively, showcasing just how much rising energy prices are expected to boost the top and bottom line.
Cheap Oil Stocks: Occidental Petroleum (OXY)
Not long ago, we wrote about Occidental Petroleum, when we were looking at a handful of energy stocks to buy. Unlike, say, Pioneer Natural Resources — which is all-in on one area — Occidental has its hands all over the globe.
Of course, this global reach presents both opportunity and risk. But clearly, it’s the former that’s come to light. Shares have been exploding higher lately and the involvement of Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) has got the stock climbing even more.
The stock actually trades at around 15 times earnings, which is incredible considering the growth. While analysts expect “just” 16% revenue growth — that’s still pretty impressive even though it lags some of its peers. Meanwhile, consensus expectations call for more than 155% earnings growth.
With the bottom-line forecast to more than double, it’s no wonder this one has become a hot commodity.
The best part? Buffett’s not done. After accumulating a $3 billion stake in the company — which is notable considering its more than $55 billion market cap after the big rally — Berkshire upped its stake by 50%, accumulating another $1.5 billion in equity.
At this valuation, it’s no surprise.
Continental Resources (CLR)
Like some of the others on the list, as well as the last company on it, Continental Resources is operating in an unhedged manner. The company noted that it’s an “unhedged oil producer,” but that it’s started to “layer in natural gas hedges for 2022 through year-end 2023.”
That said, management believes that higher prices are in play, saying, “We are largely unhedged for all, as we believe market fundamentals are supportive of price participation due to supply and demand rebalancing.”
Many will point to crude prices being down around 25% from the highs. What they fail to realize is that they are still higher by roughly 10% over the last month and 28% over the last six months.
While volatile, these companies are printing cash with oil on the run. And that includes Continental and CLR stock.
Cheap Oil Stocks: Magnolia Oil & Gas (MGY)
Last but not least, we have Magnolia Oil & Gas. With a near-$5.5 billion market cap, it’s the smallest company on this list, but that doesn’t mean it should be ignored. Magnolia Oil & Gas is headquartered out of Houston, TX. that operates “primarily in South Texas in the core of the Eagle Ford Shale and Austin Chalk formations.”
Shares trade at a paltry 8 times earnings, although analysts aren’t all that optimistic about its growth. They expect just 20% earnings growth on 17% revenue growth.
With its smaller size comes more risk, but also, more opportunity. As management explained on Feb. 17:
“Improvement in drilling times at Giddings will result in more wells and more capital for the same number of rigs. As a result of our strong balance sheet, Magnolia fully captures current high product prices by remaining…fully unhedged.
…[W]e remain completely unhedged for both our oil and gas production, allowing us to fully capture higher product prices.”
So while the stock isn’t getting all that much respect, just know that it should be rolling in the cash as long as oil prices remain elevated.
On the date of publication, Bret Kenwell 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.