Crude oil has gone through extreme volatility in the last three years.
From 2020 historical lows, crude averaged $100.9 per barrel last year. However, with monetary policy tightening and a global economic slowdown, oil traded at lows of $63 in March. After some consolidation, black gold currently trades at $90. Accumulating oil stocks now is a prudent move as the energy source approaches the $100 mark.
In fact, the International Monetary Fund (IMF) expects global GDP growth to remain stable at 3% next year. With geopolitical tensions, oil production reduction, and potential rate cuts in 2024, the oil outlook is bullish.
Higher oil prices translate into robust cash flows, deleveraging, and healthy dividend growth. Therefore, oil companies present as an attractive investment theme, with potential for oil stocks to trend higher in the next 12 to 18 months.
Let’s focus on three oil stocks to buy and hold for value creation.
Chevron Corporation (CVX)
Chevron Corporation (NYSE:CVX) is among the best oil stocks to buy. As crude trends higher, the undervalued oil stock is poised for a big rally. Besides the prospects of healthy capital gains, CVX stock offers an attractive dividend yield of 3.6%.
Chevron’s likability is due to quality assets that have a low break-even. Last year, Brent crude oil averaged $100.9 per barrel and the company reported operating cash flow of $47.5 billion (excluding working capital). Given the fact that crude trades at $90, the CVX is positioned for robust cash flows.
Additionally, the Company is targeting annual capital expenditure of $14 billion to $17 billion through 2027. These investments will ensure that reserve replacement remains robust. At the same time, Chevron is investing aggressively in lower carbon business. This includes renewable fuels and hydrogen energy.
Overall, CVX stock is a potential multibagger with a time horizon of five years.
Aker BP ASA (AKRBF)
Aker BP (OTCMKTS:AKRBF) stock is worth consideration among undervalued oil stocks. Aker BP is an under-the-radar company that can create immense value in the coming years. Besides attractive valuations, AKRBF offers a dividend yield of 9.89%.
As an overview, Aker BP is a Norwegian oil and gas company with assets in the Norwegian Continental Shelf. The company has stake in the prized Johan Sverdrup asset that’s a multi-year cash flow machine.
For cash flow potential, Aker reported Q2 2023 total income of $3.3 billion, EBITDA of $3 billion, and a net realized price of $75 per barrel. If oil trades at $100 per barrel, Aker will be primed to deliver annualized EBITDA that edges near $20 billion.
Notably, the company has a strong balance sheet with leverage ratio at 0.22 for Q2 2023. Robust cash flows will support aggressive exploration coupled with shareholder value creation through dividends.
Transocean (RIG)
Transocean (NYSE:RIG) is a potential multibagger from the oil and gas space.
The company is a provider of offshore contract drilling services and poised to benefit as prices rise. Impressively, Transocean has a modern fleet of ultra-deep water and harsh environment rigs.
In July, Transocean reported an order backlog of $9.2 billion and since then has won additional awards worth $700 million, clearly underscoring cash flow visibility.
Furthermore, Transocean reported a liquidity buffer of $1.6 billion as of Q2 2023, situating it for fleet expansion. At the same time, the company is targeting debt reduction by $3 billion in the next few years. RIG stock is likely to trend higher as credit metrics improve.
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.
