Oil stocks have been subdued in the last few quarters. This does not come as a surprise with Brent oil trending lower after making a higher of $120 in 2022. The downside in oil has been due to tight monetary policies that have impacted global GDP growth.
It however seems that the worst of the correction for oil is over. Currently, Brent oil trades at $80 and it’s expected that oil will average $82.62 for the year. Further, Brent is likely to increase to $86.48 next year. Given the production cut by OPEC and allies coupled with a stable GDP growth outlook, it’s a good time to invest in undervalued oil stocks.
An important point to note is that there are talks about the fall in demand for oil due to renewable energy sources. However, it’s worth noting that in 2019, fossil fuels share as a primary energy source was 80%. This will gradually trend lower, but it’s too early to believe that the demand for oil will plunge.
Let’s discuss three undervalued oil stocks to buy and hold.
Chevron Corporation (CVX)
Chevron Corporation (NYSE:CVX) stock is among the undervalued oil stocks to accumulate. Even with the decline in oil price, CVX stock has remained sideways in the last 12 months. A dividend yield of 3.81% is also attractive and I expect sustained dividend growth.
From a fundamental perspective, an investment grade balance sheet is a key reason to like Chevron. This positions the company for aggressive organic and acquisition-driven growth. Recently, the company acquired PDC Energy. This acquisition would add more than 1 billion barrels of oil equivalent proved reserves.
Chevron has also committed to investing $13 to $15 billion annually over the next few years. This will ensure that reserve replacement remains robust. It’s worth noting that if oil remains above $80 per barrel, the company’s low break-even assets are positioned to generate operating cash flow in excess of $30 billion. This provides ample headroom for dividend growth and share repurchase.
Aker BP ASA (AKRBF)
Aker BP ASA (OTCMKTS:AKRBF) stock is among the oil stocks that are still under the radar. AKRBF stock looks significantly undervalued and offers an attractive dividend yield of 9.96%.
As an overview, Aker BP is an oil and gas exploration company with a focus on the Norwegian Continental Shelf. The company has some prized assets with a low breakeven. Aker BP has therefore been delivering robust cash flows even with the correction in oil.
To put things into perspective, Aker BP reported a realized oil price of $75 per barrel in Q2 2023. For the period, the company reported revenue and EBITDA of $3.3 and $3 billion respectively. Once oil trends are higher, the company will be positioned to deliver robust free cash flows.
It’s also worth noting that Aker BP has an investment-grade balance sheet. As of Q2 2023, the company reported a liquidity buffer of $6.1 billion. Aker has a history of growth through acquisitions. Considering the financial flexibility, I believe that potential inorganic growth will accelerate value creation.
Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) stock has been in the limelight with Warren Buffett on an aggressive buying spree. OXY stock has remained resilient in the last 12 months backed by positive fundamental developments. I believe that the 1.15% dividend yield stock will be a long-term value creator and is trading at a valuation gap.
In a recent development, Occidental announced the acquisition of Carbon Engineering for a consideration of $1.1 billion. The latter is in the business of capturing carbon dioxide out of the atmosphere, which can be stored deep underground or used to produce clean energy. I believe that the clean energy segment will be significant for Occidental in the next five years.
In the core oil and gas business, Occidental will continue to create value. For Q2 2023, the company reported a free cash flow of $1 billion. The company already has an investment-grade balance sheet and plans to continue deleveraging. With quality Permian assets, cash flows will support growth and value creation.
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.
