Some of the best oil stocks have seen significant price action in the last few years. This has been in sync with the volatility in crude oil since the pandemic.
From historic lows during the pandemic, crude oil surged well above $100 per barrel. However, as growth concerns increased on the back of tightening monetary policies, oil declined meaningfully to 2023 lows of $63 per barrel.
Now, with fears of recession declining and with production cuts by OPEC and its allies, oil is in recovery mode. The potential end to monetary tightening is also likely to support oil and Brent is back to $87 per barrel.
I believe that the positive momentum is likely to sustain and it’s a good time to buy some of the best oil stocks. Let’s discuss the reasons to be bullish on these fundamentally strong oil companies.
Chevron Corporation (NYSE:CVX) stock has remained sideways in the last 12 months. With volatility in oil prices, I believe that CVX stock has been resilient. Backed by strong fundamentals and quality assets, I expect the stock to break out on the upside. It’s worth noting that CVX stock offers an attractive dividend yield of 3.68%.
I believe that the most important reason to be bullish on Chevron is its high-quality assets with an attractive break-even point. To put things into perspective, Chevron reported operating cash flow of $6.3 billion for Q2 2023. This came in a low oil price environment. If oil trades in the range of $80 to $90 per barrel, Chevron is positioned to deliver annual OCF in excess of $30 billion.
Given this point, it’s not surprising that the company is targeting an annual capital expenditure of $13 billion to $15 billion through 2027. This will ensure steady production growth. At the same time, Chevron is diversifying its portfolio toward low-carbon business.
Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) stock has been Warren Buffett’s favorite. The legendary investor has boosted his stake in the oil and gas company above 25%. I believe that there are multiple reasons to be positive about this 1.12% dividend yield stock.
First, the company has quality assets in the Rockies, Permian Basin, and Gulf of Mexico. For Q2 2023, Occidental reported $1 billion in free cash flows. As oil trends higher, the annual FCF visibility is likely to be in excess of $5 billion.
Robust FCF will ensure two things. First, Occidental will continue to deleverage and I expect sustained improvement in credit metrics. Second, Occidental will be positioned to invest aggressively in core assets and its emerging low-carbon business.
Recently, the company acquired Carbon Engineering for $1.1 billion. Carbon Engineering is focused on the deployment of large-scale Direct Air Capture technology. Using this, carbon dioxide can be captured and used to produce clean, affordable transportation fuels.
In my view, Aker (OTCMKTS:AKRBF) is a hidden gem among oil stocks and will create immense value. The 8.12% dividend yield stock looks undervalued and is poised for a strong reversal rally in the coming quarters.
As an overview, Aker BP ASA is an oil and gas exploration company with a focus on the Norwegian Continental Shelf. The company has some prized assets like the Johan Sverdrup. Besides a long asset life, the company’s NCS assets have a low break-even point. To put things into perspective, Aker BP reported a realized oil price of $75 per barrel for Q2 2023. At this price, the company reported revenue and EBITDA of $3.3 billion and $3 billion, respectively.
Further, its operating cash flow was $2.9 billion. Assuming a scenario where oil trades around $100 per barrel, Aker BP is likely to be a massive cash flow machine. The correction in AKRBF stock is therefore a good accumulation opportunity for the long term.
Marathon Oil (MRO)
During the pandemic-driven oil crash, Marathon Oil (NYSE:MRO) stock traded at lows of $3.1. Considering the highs of 2023, MRO stock has already delivered 10-bagger returns. I believe that as fundamentals improve, MRO stock will remain in an uptrend.
Marathon Oil is a U.S.-focused oil and gas exploration company. The company’s assets are in the Permian, Eagle Ford, Bakken, and Oklahoma. As of December 2022, Marathon reported proved reserves of 1,338 million barrels of oil equivalent. A strong asset base provides visibility for sustained production and cash flow upside.
An important point to note is that Marathon has an investment-grade balance sheet. This gives the company financial flexibility for robust dividend growth and share repurchases. Over the trailing seven quarters, the company has repurchased shares worth $4.2 billion.
At the same time, Marathon has been making significant capital investments. For Q2 2023, the company’s capital expenditure was $632 million. This will ensure healthy reserve replacement and steady production growth.
Transocean (NYSE:RIG) is another attractive name among the best oil stocks to buy and hold. The company is a provider of offshore contract drilling services with focus on deep and ultra-deepwater floaters. It’s worth noting that RIG stock has surged by almost 150% in the last 12 months. Considering fundamental factors, I expect the stock to remain in an uptrend.
As of July, Transocean reported an order backlog of $9.2 billion. Further, in the last three months, the company’s order intake has been $1.2 billion. A robust backlog and healthy intake activity provide clear cash flow visibility.
An important point to note is that Transocean expects to reduce debt by $3 billion in the next few years. As credit metrics improve, the stock will be re-rated. Additionally, with improved financial flexibility, there is a strong case for rig acquisitions if market conditions remain positive. With these factors in mind, the outlook for RIG stock is bullish.
Borr Drilling (BORR)
Borr Drilling (NYSE:BORR) is another attractive offshore drilling contractor to oil and gas companies globally. Backed by strong fundamental developments, BORR stock has trended higher by 83% in the last 12 months. There are several reasons to believe that the stock will remain in an uptrend.
First and foremost, Borr has a robust order backlog of $1.64 billion. Recently, the company won new orders worth $211 million and the order book has swelled to almost $1.9 billion. This provides clear revenue and cash flow visibility.
Further, the company has two jack-up rigs under construction. Once these are deployed, the company’s revenue growth will be supported. It’s also worth noting that the order intake in 2022 and the current year has been at a higher rate. This has translated into sustained growth in adjusted EBITDA. As cash flows swell, Borr will be positioned to deleverage.
Crescent Point Energy (CPG)
Crescent Point Energy (NYSE:CPG) stock is a relatively smaller name that looks attractive. CPG stock trades at a forward price-earnings ratio of 7.1x and offers a dividend yield of 3.57%. I believe that a big rally is coming considering the valuations and positive business developments.
In a recent development, Crescent Point sold North Dakota assets for $500 million. The company is focused on its core assets in Kaybob Duvernay and Alberta Montney. Since 2018, Crescent has acquired assets worth $3 billion in these regions.
It’s also worth noting that the company expects to reduce debt to less than $2.2 billion by the end of the year. This would imply total debt that’s 1x adjusted funds flow. As the balance sheet improves, Crescent will be positioned to increase dividends. The company has also repurchased 16.5 million shares in the year to date. With these positives, I expect CPG stock to be a value creator.
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.