In recent times, crude oil traded at highs of $95 in September 2023. However, as contractionary monetary policies impacted global growth, crude has declined. It’s unlikely that oil will witness further correction from current levels of $75. Therefore, it’s a good time to look at some of the best energy stocks to buy.
Coming to the reasons to be positive, global central banks will probably pursue expansionary policies in 2024. This may translate into global GDP growth acceleration. As demand for oil increases on a relative basis, the price-action is should to be positive.
Additionally, factors of geopolitical tensions will support oil prices. Further, OPEC and allies have been proactive in supporting oil prices through production cuts. Overall, the outlook for energy prices is positive, and 2024 looks to be a good year for energy stocks. Let’s discuss three ideas that appear undervalued and poised for a significant rally.
Chevron Corporation (CVX)
Chevron Corporation (NYSE:CVX) stock has witnessed a significant correction of 21% in the last 12 months. The blue-chip stock seems undervalued and offers a dividend yield of 4.24%. If oil trends higher, expect CVX stock to deliver total returns of 20% to 30% for the year.
From a fundamental perspective, Chevron Corporation is among the best oil and gas stocks. The company has an investment grade balance sheet and operating cash flow potential of more than $40 billion. This allows CVX to sustain dividends and aggressive invest in exploration activities.
At the same time, Chevron Corporation has been active on the inorganic growth front. In October 2023, the company announced the acquisition of Hess Corporation (NYSE:HES).
For the current year, CVX has an aggressive capital investment target of $16 billion. Once the acquisition of Hess is completed, the annual capital expense budget is expected to be between $19 and $22 billion. This will support long term cash flow upside.
Aker BP ASA (AKRBF)
Aker BP ASA (OTCMKTS:AKRBF) doesn’t get the attention it deserves as the stock is not listed on the main exchanges. However, the oil and gas exploration company can be a massive value creator in the next few years.
Aker BP ASA has some prized assets in the Norwegian Continental Shelf that provide robust revenue and cash flow visibility. As of 2022, AKRBF reported 2P reserves of 1,859mmboe. Further, the company has 2C resources of 744mmboe.
Notably, the company’s oil portfolio has an attractive break-even of $35 to $40 per barrel. Therefore, Aker BP ASA is positioned to deliver robust free cash flows even at $70 to $80 per barrel oil.
Further, the company has a strong balance sheet with $6.8 billion in liquidity buffer and a leverage ratio of 0.19. This provides high financial flexibility for aggressive investment in exploration programs. At the same time, AKRBF has grown in the past through acquisitions. Considering the financial flexibility, expect potential mergers to add to the growth visibility.
Transocean (RIG)
Transocean (NYSE:RIG) has declined sharply by 36% in the last six months. With oil trending lower, offshore drilling activity might be impacted. Hence, it’s the reason for RIG stock trending lower. However, if there is a reversal in oil price this year, investors could expect a strong rally for the stock from oversold levels.
As an overview, Transocean is a provider of offshore contract drilling services globally. Currently, the company has 37 floaters with 100% focus on harsh environment and ultra-deep-water. Further, Transocean reported a strong backlog of $9.4 billion as of October 2023. This provides clear revenue and cash flow visibility for the current year.
Additionally, if oil trends higher, expect the order intake for 2025 and beyond to be robust. Therefore, correction is a good opportunity to consider fresh exposure to RIG stock. Moreover, Transocean is focused on deleveraging while it expects possible initiation of dividends.
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.
