The year has been subdued for oil and gas stocks. It’s not surprising because oil traded below $70 per barrel in the first half of the year. Before talking about stock predictions for the sector, it’s important to mention that the outlook for 2024 is likely to be better. There are several oil & gas stocks to buy at attractive levels that are poised for a strong entry into 2024.
While crude has corrected in the last few trading sessions, the outlook remains bullish. Analysts at Bank of America believe that oil is likely to touch $100 per barrel before 2024. Chevron CEO has a similar opinion about oil before the beginning of the new year.
If these expectations hold true, oil and gas stocks are likely to witness a strong rally in the coming months. After few quarters of consolidation, stocks in the sector are likely to enter 2024 with a big breakout. Coming back to the stock predictions, these are the oil and gas stocks to buy for a strong rally.
Oil & Gas Stocks to Buy: Chevron (CVX)
Chevron (NYSE:CVX) stock has remained sideways for the last 12 months. I believe that the stock is ready to roar into 2024 after an extended period of consolidation. Valuations are attractive and CVX stock offers a robust dividend yield of 3.6%.
There are two important reasons to like Chevron. First, the Company has an investment grade balance sheet with a net-debt ratio of 7% as of Q2 2023. High financial flexibility allows the Company to pursue aggressive organic and acquisition driven growth. In August, Chevron completed the acquisition of PDC Energy. The acquisition will add more than a billion barrels of oil equivalent to Chevron’s proved reserves.
Further, Chevron’s assets have an attractive break-even. For Q2 2023, the Company reported operating cash flow of $6.3 billion. If oil averages around $100 per barrel, the Company will be positioned for annual OCF of $45 to $50 billion.
Aker BP ASA (AKRBF)
Aker BP ASA (OTCMKTS:AKRBF) is a hidden gem in the oil and gas sector. AKRBF trades at a valuation gap and offers an attractive dividend yield of 9.9%. As oil trends higher, I believe that the stock is poised for a big rally.
Aker BP is focused on the Norwegian Continental Shelf. The Company has high quality assets like the Johan Sverdrup with a low oil price break-even. The Company’s portfolio has a break-even oil price of $35 to $40 per barrel. The cash flow potential is therefore significant if oil trades around $90 to $100 per barrel. Further, with 2P reserves of 1.86 billion barrels of oil equivalent, Aker BP is positioned to deliver sustained production growth.
I must add that Aker has a quality balance sheet. As of Q2 2023, the Company reported a liquidity buffer of $6.1 billion. Further, with leverage at 0.22, there is ample flexibility to leverage for aggressive exploration activity and potential acquisitions. Historically, Aker BP has pursued the acquisition path to boost its asset base.
Oil & Gas Stocks to Buy: Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) is Warren Buffett’s favorite oil and gas company. The legendary investor now holds more than 25% stake in Occidental. Over a 12-month period, OXY stock has traded marginally lower. A rally is likely with the stock looking attractive at current levels of $60.
From a fundamental perspective, Occidental has an investment grade credit rating. For Q2 2023, the Company reported free cash flow of $1 billion. Healthy cash flows have allowed Occidental to deleverage and make aggressive capital investments.
For the current year, Occidental plans to invest $5.4 to $6.2 billion. The major focus is on Permian assets that will continue to be cash flow drivers. At the same time, Occidental is investing in the lower carbon business. In August, the company acquired Carbon Engineering for a consideration of $1.1 billion. The Company has also initiated preliminary engineering study for a one million tonne-per-year Direct Air Capture facility in the United Arab Emirates.
Transocean (RIG)
Transocean (NYSE:RIG) trended higher by 71% for year-to-date. I remain positive on further upside and with 21% short interest, RIG stock might be poised for a short squeeze rally.
As an overview, Transocean is among the leading players in the offshore drilling industry. As of July, the Company reported an order backlog of $9.2 billion. With few recent order intakes, the backlog has swelled to almost $10 billion. This provides Transocean with a clear revenue visibility.
I must add that in the last few years, Transocean has worked on transforming its fleet to focus on ultra-deepwater and harsh environment rigs. The fleet age has also reduced significantly to 10 years. These two factors have translated into a better international rate of return and payback period as compared to peers.
It’s also worth noting that as of Q2 2023, Transocean reported a strong liquidity buffer of $1.6 billion. With visibility for healthy cash flows, the Company can potentially pursue fleet expansion. At the same time, Transocean is looking to reduce debt by $3 billion in the next few years.
Borr Drilling (BORR)
Borr Drilling (NYSE:BORR) is another attractive offshore drilling contractor that seems poised for a sustained uptrend. The stock has trended higher by 38% for year-to-date. However, considering the potential growth in revenue and EBITDA, the stock remains attractively valued.
Currently, Borr Drilling operates a fleet of 24 moderns jack-ups. The average age of the fleet is six years and the current backlog stands at $1.9 billion. A strong backlog coupled with a healthy order intake is likely to translate into sustained growth for Borr.
To put things into perspective, the Company has guided for a base case revenue and EBITDA of $1.1 billion and $575 million respectively for the next year. Borr expects to accelerate revenue and EBITDA to $1.3 billion and $780 million respectively by 2026.
Of course, this is a base case scenario and if oil sustains around $100 per barrel, the outlook is likely to change significantly. With a strong credit profile and a healthy backlog, BORR stock is a potential value creator.
Marathon Oil (MRO)
Marathon Oil (NYSE:MRO) stock trades at an attractive forward price-earnings ratio of 9.5. The stock also offers a dividend yield of 2%. After an extended period of consolidation, valuations indicate that the stock is poised for a breakout rally.
In terms of assets, Marathon is among the best. The Company has exposure to the Permian, Bakken, and Eagle Ford, in the United States. As of December 2022, the Company had 2P reserves of 1,338 million barrels of oil equivalent. A strong reserve base provides cash flow visibility even on stable production.
From a fundamental perspective, Marathon oil has strong cash flows, which the company has used to create shareholder wealth. The company reported adjusted free cash flow of $532 million as of 2Q 2023. This implies an annualized FCF potential of $2 billion.
It’s worth noting that Marathon paid $62 million as dividend and utilized $372 million in share repurchase in the 2Q 2023. I must add that a total liquidity buffer of $2.3 billion provides flexibility for aggressive exploration activity.
Crescent Point Energy (CPG)
Crescent Point Energy (NYSE:CPG) is among the relatively smaller players in the oil and gas industry that looks attractive. Besides trading at a valuation gap, CPG stock offers an attractive dividend yield of 3.76%.
Last month, Crescent Point released the initial guidance for 2024 and there are several positives to note. First, the Company expects annual production in the range of 145,000 to 150,000 barrels of oil per day. With this production target, Crescent aims at generating excess cash flow of over $1 billion.
Crescent Point has also provided an initial long-term outlook. It’s expected that production will increase to 180,000boepd by 2028. Even at $70 per barrel oil, the Company expects after-tax excess cash flow of over $4.3 billion on a cumulative basis through 2028.
The important point to note is that 60% of the excess cash will be directed towards dividends and share repurchase. Therefore, there is ample room for shareholder value creation. Additionally, potential acquisition of assets can boost the growth outlook.
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.
