Riding the Oil Wave: 3 Stocks to Buy Amid Middle East Tensions


  • Oil prices have soared on increased tensions in the Middle East.
  • ConocoPhillips (COP) COP has extensive upstream operations.
  • Baker Hughes (BKR): Oil companies like this onetypically increase drilling and production activities when prices start to go up.
  • Devon Energy (DVN) This stock was recently upgraded at Wells Fargo as analysts see an attractive entry point. 
oil stocks - Riding the Oil Wave: 3 Stocks to Buy Amid Middle East Tensions

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Oil prices have been very volatile in recent days following Iran’s attack on Israel over the weekend. Although the escalation was less severe than feared, commodity investors are still likely to price in concerns over potential disruptions in oil supply. Along these lines, we look at three oil stocks to buy amid rising Middle East tensions. 

The initial fears of an escalation had caused a spike in oil prices on Friday, but these fears were mitigated when Israel successfully intercepted the attack, involving over 300 missiles and drones.

In response to the increasing risks, Citi (NYSE:C) raised its short-term forecast for oil prices from $80 to $88 per barrel, citing a higher risk premium. The bank also noted that while the current market hasn’t fully priced in the possibility of an ongoing conflict between Iran and Israel, such a scenario could potentially push oil prices above $100 per barrel. 

However, Citi cautioned that any signs of de-escalation could quickly reverse this trend, potentially dropping prices to the high $70s or low $80s. Similarly, Societe Generale (OTCMKTS:SCGLY) also adjusted its forecasts, now expecting Brent crude to reach $91 per barrel in the second quarter and West Texas Intermediate to hit $87.5 per barrel. 

For 2024, Socgen anticipates Brent to average $86.8 and WTI $83.3 per barrel. The bank highlighted that the probability of direct military conflict between the United States and Iran, while still considered a tail risk, has risen from 5% to 15%, which could lead to a significant spike in crude prices, potentially exceeding $140 per barrel.

“Beyond the short-term spike induced by geopolitics, our base case for oil remains a $90 Brent through May,” J.P. Morgan (NYSE:JPM) said in its report to clients.

ConocoPhillips (COP)

Oil Stocks ConocoPhillips (COP)

ConocoPhillips (NYSE:COP), one of the top three oil stocks, and a major global energy corporation, benefits significantly from higher oil prices due to its extensive upstream operations, which focus on oil and gas exploration and production. Oil prices have surged to their highest levels since October, increasing crude prices which boost the company’s revenue and profitability, enhancing shareholder value in favorable market conditions.

Back in February, ConocoPhillips reported robust fourth quarter results, surpassing analyst expectations. The company’s adjusted earnings per share reached $2.40, significantly higher than the consensus of $2.07.

Adjusted net income also exceeded forecasts, coming in at $2.86 billion against an expected $2.5 billion. Additionally, their cash flow from operations was $5.26 billion, slightly above the estimate of $5.21 billion.

In their commentary, management focused on several key areas including upstream production outlook and strategies for capital allocation in 2024. They emphasized plans to enhance capital returns and provided updates on strategic priorities like inorganic growth and ongoing organic growth projects, which makes COP one of the top oil stocks to buy.

Analysts remain optimistic about ConocoPhillips’ future amid expectations of the capital returns yield of about 7% for 2024/2025 and an average return on capital employed (ROCE) of approximately 18% for 2024-2026.

Baker Hughes (BKR)

The Baker Hughes (BKR) sign and office building in Houston, Texas.
Source: JHVEPhoto / Shutterstock.com

Baker Hughes (NYSE:BKR) benefits from higher oil prices as they typically increase drilling and production activities, boosting demand for the company’s oilfield services and equipment. In layman’s terms, this heightened activity can lead to greater utilization of Baker Hughes’ services.

Baker Hughes recently provided its financial outlook for the first quarter and full year of 2024, revealing expectations of sustained growth across its various segments. For the first quarter, the company anticipates revenues ranging from $6.10 billion to $6.6 billion, with a midpoint slightly below the estimated $6.49 billion. 

Looking ahead to the full year of 2024, Baker Hughes expects total revenues to range from $26.50 billion to $28.50 billion, with the consensus estimate positioned at $28.07 billion. 

BKR stock is modestly down year-to-date given the investor focus on AI and tech stocks, which makes a solid candidate for outperformance if oil prices continue to grind higher.

Devon Energy (DVN)

The logo for Devon Energy (DVN) is displayed on a sign outside an office.
Source: Jeff Whyte / Shutterstock.com

Devon Energy (NYSE:DVN) is one of the companies that benefit notably from higher oil prices. This exposure enhances profitability as it boosts cash flow from its operations, particularly in its key shale production areas. 

This oil stock recently received a boost after Wells Fargo (NYSE:WFC) commodity analysts upgraded the rating from Equal Weight to Overweight, while also boosting the price target from $46.00 to $59.00. 

This was the 4th analyst upgrade Devon stock received since November with Wall Street analysts seeing a combination of strong fundamentals and attractive valuation, which finally seems favorable when compared to peers. 

Initially, Devon’s premium valuation deterred higher ratings, but its current position, showing strong forward free cash flow (FCF) yields, presents a compelling entry point, Wells Fargo said. 

“We now believe the stock offers an attractive entry point across most valuation metrics,” they said in a note.

On the date of publication, Shane Neagle 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.

Shane Neagle is fascinated by the ways in which technology is poised to disrupt investing. He specializes in fundamental analysis and growth investing.

Article printed from InvestorPlace Media, https://investorplace.com/2024/04/riding-the-oil-wave-3-stocks-to-buy-amid-middle-east-tensions/.

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