Crude oil has been in a downtrend in the last few quarters. An increase in interest rates and heightened recession fears have contributed to this move. I, however, believe that the worst of the correction is over. From an investment perspective, some of the best oil stocks are trading at attractive valuations, making it a great time to buy for those seeking high total returns.
First, it’s important to discuss the reasons to be bullish on oil from current levels. Global demand is starting to pick up, and fears of a prolonged slowdown appear to be abating. Additionally, OPEC and its allies have been aggressively pursuing production cuts. This is likely to support oil prices over the medium-term.
Notably, global GDP growth in 2024 is likely to accelerate compared to 2023, and interest rates are likely to peak this year. Once growth accelerates, crude oil is likely to once again trade around the $100 level. This would imply significant upside in terms of cash flow for oil and gas companies.
With this in mind, let’s discuss three oil stocks to buy for high returns.
Chevron Corporation (CVX)
Chevron Corporation (NYSE:CVX) is the best bet among blue-chip oil stocks to buy and hold for robust total returns. Indeed, Chevron has remained resilient, even as oil prices have trended lower over the last few quarters. The company’s valuation looks attractive, and the stock offers a healthy dividend yield of 3.9%.
One reason to like Chevron is its strong balance sheet. As of Q1 2023, the company reported a net debt ratio of 4.4%. Further, even with lower realized oil prices, Chevron reported operating cash flow of $7.2 billion for the quarter. With high financial flexibility, the company is positioned to increase dividends and continue with share repurchases over time.
At the same time, Chevron plans to invest $13 to $15 billion annually over the next few years. This will ensure that the company’s reserve replacement ratio remains strong. Additionally, Chevron is investing in low-carbon businesses (mainly renewable fuels), in a bid to further diversify its business in the coming years.
Aker BP (AKRBF)
Aker BP (OTCMKTS:AKRBF) is another high quality oil stock to buy for healthy total returns. The oil exploration company is focused on the Norwegian Continental Shelf, and like the other companies on this list, has strong fundamentals. Currently, AKRBF stock offers a dividend yield of 8.1% and I believe that dividend growth is likely to a robust.
If I had to talk about a single reason to like Aker BP, it would be its low break-even assets. In Q2 2023, the company reported revenue of $3.3 billion and EBITDA of $3 billion. For the quarter, the company’s production cost per barrel was $56. Thus, once oil trends higher, operating, and free cash flows will be robust.
From a balance sheet perspective, Aker BP reported a leverage ratio of 0.22 as of Q2 2023. With an investment grade credit rating, the company has high financial flexibility. This implies the company has plenty of room to aggressively explore its assets and build its reserves. At the same time, Aker BP has historically pursued mergers and acquisitions to bolster its growth. Thus, this is a stock investors may want to consider for growth-oriented upside in this sector.
Occidental Petroleum (OXY)
Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) has already boosted stake in Occidental Petroleum (NYSE:OXY) to 25%. The big stake in this oil giant does not come as a surprise. Occidental is attractive at current levels, and is likely to be a cash flow machine in the coming years.
Like the first two companies discussed, Occidental has an investment grade balance sheet. The company plans to further reduce its debt, which will incrementally improve its credit metrics over time as well.
An important point to note is that Occidental reported free cash flow of $1.7 billion for Q1 2023. With annualized free cash flow potential of $7 billion, the company is positioned to create tremendous value for shareholders. At least, Warren Buffett seems to think so. Last quarter, the company repurchased $752 million in common stock and redeemed $647 million in preferred stock.
Occidental has guided for dividends being sustainable at the $40 level for WTI crude. Such a low break-even number is excellent news for investors concerned about commodity price risk. Indeed, for those who think crude prices are headed higher from here (like me), OXY stock is one to bet on as a potential breakout candidate in the years to come.
On the date of publication, Faisal Humayun did not hold (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.
