3 Undervalued Oil Stocks to Buy Before They Bubble Up

  • These three undervalued oil stocks could have more upside in 2022.
  • Diamondback Energy (FANG): The company anticipates generating $3.0 billion to $4.4 billion in annual free cash flow this year, up from $2.4 billion in 2021.
  • Vertex Energy (VTNR): Completed the acquisition of Shell’s (SHEL) refinery in Alabama and set to start renewable diesel production by the first quarter 2023.
  • W&T Offshore (WTI): Recent acquisition adds proven reserves of 1.4 million barrels of oil equivalent to W&T’s existing portfolio.
oil stocks: stacks of oil barrels
Source: Shutterstock

Undervalued oil stocks, our topic for today, seem hard to find following the industry’s breathtaking returns in 2022. For instance, the Dow Jones U.S. Oil & Gas Index is up over 33% year-to-date (YTD), while the S&P 500 Index has seen a 13% decline.

Many investors wonder whether most of the easiest money may have already been made. Yet, the industry still offers pockets of buying opportunities for long-term investors, supporting some undervalued oil stocks with plenty of room to run.

The war in Ukraine has boosted energy prices around the globe. In addition, energy security is back in the front line of political agendas. As we write, Brent crude hovers above $105 territory.  The uncertainty in Eastern Europe is likely to provide further tailwinds for oil and natural gas price.

Yet, a recent IEA Oil Market Report suggests that due to the most recent pandemic lockdowns in China, oil demand has come down slightly. Therefore, we can possibly expect more volatility on Wall Street.

With that information, here are three undervalued oil stocks that could generate more market-beating returns in 2022:

FANG Diamondback Energy $141.16
VTNR Vertex Energy $10.77
WTI W&T Offshore $5.69

Diamondback Energy (FANG)

diamondback energy logo on its website to represent oil stocks
Source: Pavel Kapysh / Shutterstock.com

Our first undervalued stock is Diamondback Energy (NASDAQ:FANG). This independent oil and gas producer operates exclusively in the Permian Basin.

Diamondback reported strong Q4 results on Feb. 22. Revenue increased 163% year-over-year (YOY) to $2.02 billion. Earnings also hit record highs. Adjusted earnings per share came in at $3.63, much higher than 82 cents per share in the prior-year quarter. Cash and equivalents ended the period at $672 million.

Due to decreasing levels from Russia, tighter supply levels are expected in the coming months. Thus, FANG stock is positioned for solid growth. In 2022, management forecasts annual free cash flow between $3.0 billion and $4.4 billion, a significant increase from the $2.4 billion generated in 2021.

Diamondback recently increased its base dividend by 20% to $2.40 per share annually. The goal of the board is to return at least half of its free cash flow to shareholders. Such a move implies that the oil producer could return at least $1.5 billion to shareholders through 2022.

FANG stock is up 69% over the past year and 17% YTD. FANG shares are trading at 5.34 times forward earnings and 3.3 times trailing sales. Meanwhile, the 12-month median price forecast for FANG stock stands at $171. Potential investors could regard a potential decline toward $120 as a better entry point.

Vertex Energy (VTNR)

a bunch of oil barrels are stacked high
Source: Shutterstock

Next up is Vertex Energy (NASDAQ:VTNR) is not a pure-play energy stock, but is still one that could appeal to InvestorPlace.com readers. Vertex is an environmental services company. In other words, it recycles industrial waste streams as well as commercial chemical products.

Thus, the company collects used oil from other businesses. They include oil change and automotive repair shops as well as petroleum refineries and petrochemical manufacturers.

Vertex Energy released Q4 results on March 8. Revenue increased 97% YOY to $44.7 million. Adjusted net income came in at $4.6 million, compared to an adjusted net loss of $2.7 million a year ago. Cash and equivalents ended the period at $137 million.

In late January, Vertex Energy’s planned sale of its oil-recycling assets was terminated amid increased antitrust scrutiny. The result was a sharp decline in VTNR stock.

Then, on April 1, Vertex announced the acquisition of Shell’s (NYSE:SHEL) refinery in Alabama. It plans  to convert this facility to produce renewable diesel as early as the first quarter of 2023.

VTNR stock is up roughly an eye-popping 600% over the past year and 110% YTD. Shares are trading at 24.1 times forward earnings and 4.3 times trailing sales.

At present, the 12-month median price forecast for VTNR stock stands at $17.50. Despite the triple-digit returns in VNTR shares, the future is likely to be bright for Vertex Energy, which could potential find itself an acquisition target.

W&T Offshore (WTI)

Black oil barrel that reads "oil" on the side in a pool of oil with other barrels
Source: Shutterstock

Our final undervalued oil stock is W&T Offshore (NYSE:WTI). This leading oil and gas exploration group focuses on the Gulf of Mexico. It is engaged in both deepwater drilling and shallow-water shelf drilling.

W&T released Q4 results on March 8. Revenue increased 75% YOY to $166 million. Adjusted net income per diluted share was 10 cents, compared with an adjusted net loss of 5 cents a year ago. Cash and equivalents ended the period at $246 million.

In 2021, the oil producer generated $91 million in free cash flow and paid off $96.5 million of debt. The company is expected to increase capital spending from $70 million to $90 million to drill four new wells this year.

Last month, the company announced the acquisition of interests in producing properties in the Gulf of Mexico for $47 million. This transaction adds proven reserves of roughly 1.4 million barrels of oil equivalent to the current portfolio.

WTI stock is up nearly 66% over the past year and 76% YTD. Shares are trading at 6.44 times forward earnings and 1.26 times trailing sales. Finally, the 12-month median price forecast for WTI stock stands at $8.10.

On the date of publication, Tezcan Gecgil 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.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.


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