The oil and gas sector consists of upstream firms that discover and create energy sources, midstream pipe companies that transfer and store oil and gas, and downstream companies that convert the energy sources into finished goods. In addition, some firms supply equipment and services for oil field drilling, and some also produce and maintain production equipment.
The oil industry is essential to the world economy. They supply energy and transportation fuels. They also provide the primary components of petrochemicals used to manufacture plastics, rubber, and fertilizer.
However, the oil sector is both unpredictable and competitive. Profits and losses can fluctuate rapidly due to modest variations in demand or the actions of petrostates such as Saudi Arabia and Russia. Their interests might conflict with those of the industry's public businesses. Supply and demand mismatches might result in astronomical price variations for oil. After Russia invaded Ukraine in early 2022, crude oil prices soared into the triple digits for the first time in years.
Moreover, investors must evaluate the effects of climate change on the long-term outlook for oil and gas. Renewable energy is witnessing a massive change in the energy market. However, this does not imply any changes in the oil field. Here are some of the best oil stocks and aspects to examine before investing in oil companies.
Are Oil and Gas Corporations a Good Investment?
Although certain firms are safer than others, oil and gas are somewhat hazardous. Typically, petroleum-based fuels and natural gas have a cost advantage over other heating and transportation fuels and a tremendous infrastructural advantage over developing renewable energy fuels. However, the industry has several unfavorable characteristics that increase the danger for traders.
The coronavirus epidemic precipitated a decline in worldwide oil consumption, while oil companies reduced output to weather the slump as travel and trade improved. However, the demand for oil products increased faster than the supply could keep up. As a result, oil prices have recovered to their levels before the COVID.
The tightening of supply and the resurgence of global demand are favorable for many oil and gas corporations, and some might reap enormous profits shortly. However, if there is one thing that energy investors should have learned over the previous decade, market circumstances may shift rapidly. For this reason, most investors interested in oil equities would be wise to concentrate on bigger, high-quality integrated oil businesses such as those mentioned in this article.
Investing in the oil business is inherently hazardous. Although each sector area has its own set of risk considerations, the oil industry is cyclical and volatile.
In general, oil consumption parallels economic development, and a strong economy may support growing oil prices and the profitability of oil producers. Nonetheless, geopolitics and capital allocation play significant roles in the business.
The world's top oil-exporting nations are members of OPEC (Organization of Petroleum Exporting Countries), a cartel that coordinates the oil policy of its members. The activities of OPEC can significantly impact oil prices, and it can restrict supply to boost prices or increase output to decrease them. Over the years, OPEC has exerted its influence, generating significant changes in oil prices.
Additionally, oil corporations that operate independently of OPEC can influence oil prices. If they dedicate an excessive amount of cash to new projects, this might result in overstock and pressure pricing. Alternatively, if they hold back too much, prices may increase. Since oil and gas assets are built over an extended period, corporations cannot rapidly boost their supply in reaction to favorable market circumstances.
Because of the volatility of oil prices, an oil firm must possess the following three qualities to endure the inevitable downturns in the industry:
Strong financial profile characterized by an investment-grade bond rating, substantial cash on hand or adequate access to inexpensive credit, and manageable, well-structured debt maturities.
Low operating expenses and reasonably consistent cash flow streams. E&P firms must be able to continue operations economically at oil prices below $40 per barrel. In contrast, midstream companies should get more than 85 percent of their cash flow from stable revenue streams, such as fee-based contracts. The operational expenses of downstream enterprises should be lower than the industry average.
Diversification. Oil firms should operate in many geographies or be at least substantially vertically integrated by engaging in multiple activities.
10 Best Oil Stocks in 2022
1. ConocoPhillips
ConocoPhillips is one of the world's major E&P-focused corporations. It has operations in more than a dozen countries and specializes in locating and producing oil and natural gas.
ConocoPhillips is advantageous due to its scale and access to some of the cheapest oil in the world, which includes a considerable exposure to the Permian Basin. In 2021, it strengthened its position in this low-cost, oil-rich region by acquiring Concho Resources and Shell's holdings. With average expenses of around $40 per barrel and many of its resources costing much less, the firm can create a substantial cash flow in nearly any oil market condition.
Due to the unpredictability of future oil demand, ConocoPhillips intends to return a substantial amount of its free cash flow to investors over the next few years. It wants to pay an ever-increasing dividend, repurchase shares, and provide variable cash returns based on its excess cash.
The corporation now combines its low-cost offering with an elite balance sheet. ConocoPhillips consistently has one of the most substantial credit ratings among E&P businesses, supported by a low leverage ratio for the industry and a significant amount of cash. Due to these features, it is one of the most certain E&P assets.
2. PDC Energy
As of April 15, PCE Energy (PDCE, $77.87) shares had gained about 60 percent year-to-date, but Wall Street believes they still have space to run.
Analysts applaud the exploration and production (E&P) company's good fourth-quarter performance, similarly optimistic expectations for 2022, and, most crucially, its capacity to create free cash flow (FCF, the cash remaining after costs, capital expenditures, and financial commitments are satisfied).
Goldman Sachs analyst Umang Choudhary writes, "We maintain our Buy rating on PDCE given the company's robust FCF profile and freshly stated commitment to return more than 60 percent of post-dividend FCF to shareholders in the form of a rising base dividend and share repurchases."
Analysts also commend PDC's acquisition of Great Western Petroleum in February, a $1.3 billion transaction. Neal Dingmann, the Trust Securities (Buy) analyst, believes future "low-cost, accretive M & M&A transactions" might be catalysts for PDCE shares.
Strong Buy is the consensus analyst rating for PDC Energy, according to S&P Global Market Intelligence. Nine analysts give the company a Strong Buy rating, four a Buy rating, and one a Hold rating.
According to the expert community, just a handful of oil and gas equities have the same potential upside as PDCE shares. The experts' average price objective of $93.14 for PDCE implies a possible upside of 20% over the next 12 months.
3. Devon Energy
Devon Energy is a U.S.-centric E&P firm, and it has activities throughout some oil-rich, low-cost basins. The company's diversification enables it to produce large quantities of inexpensive oil and natural gas, creating a substantial amount of cash.
In 2021, the firm introduced an industry-first fixed-plus-variable dividend structure. After paying its set base dividend and capital costs, it distributes up to fifty percent of its quarterly excess cash flow via variable dividend payments. The remainder of Devon's extra cash is used to improve its balance sheet and repurchase shares.
Devon is an attractive investment option for income-focused investors due to its dividend approach. They will get a reliable base income throughout the oil price cycle and have the opportunity to generate substantial payouts during periods of high prices.
4. Phillips 66
The shares of oil and gas refiner and marketer Phillips 66 (PSX, $82.85) outperformed the S&P 500 by more than 20 percentage points this year, and Wall Street anticipates more gains that surpass the market.
With an average price objective of $100.06, analysts see upside potential for PSX stock of 21% over the next 12 months. Including the substantial dividend, the predicted total return exceeds 25 percent.
Therefore, the consensus recommendation for refinery stock is Buy, with a decent certainty. Six experts recommend a Strong Buy, eight recommend a Buy, and three recommend a Hold. Through buybacks and dividends, analysts applaud PSX's financial stability, diversification, and "historical history of returning surplus capital to shareholders" through buybacks and dividends.
5. Enbridge
Enbridge maintains one of the world's largest oil pipeline networks, and it carries thirty percent of North American oil production. Enbridge also has a vast natural gas pipeline network, a natural gas utility company, and renewable energy businesses.
Long-term contracts and government-regulated tariffs support the predictable cash flow generated by Enbridge's pipeline operations. This allows the company to pay a dividend with a high yield and invest in expanding its energy infrastructure activities.
Enbridge has made substantial investments in infrastructure aimed at greener energy in recent years. This includes natural gas pipelines, offshore wind power in Europe, and hydrogen energy. Despite the company's sustained prominence in the oil industry, these investments position Enbridge for the future of energy.
6. ExxonMobil
ExxonMobil, one of the world's largest oil firms, is a fully integrated supermajor. It engages in every sector of the oil and gas industry, including exploration and production, midstream, petrochemical manufacture, refining, and marketing of refined and petroleum products.
Recent ExxonMobil initiatives have centered on cutting corporate expenses and increasing productivity. In 2022, these investments will begin to bear fruit. In the past several years, the corporation has considerably reduced its oil production costs by focusing on its highest-return assets and taking initiatives to harness its vast scale better. This allows it to create substantial cash flow when oil prices are significantly higher.
This cash flow should sustain ExxonMobil's dividend and its status as a Dividend Aristocrat. Given the development of alternative energy, many investors avoid oil equities altogether. ExxonMobil invests in fuel sources with a smaller carbon footprint, such as carbon capture and biofuels, which should allow it to happen, supplying the economy with fuel for decades.
7. Ovintiv
According to analysts, rising oil and gas prices enable E&P to play Ovintiv (OVV, $53.18) to "right-size" its financial sheet, allowing it to pay even more cash to shareholders.
Neil Mehta, an analyst at Goldman Sachs, says, "We maintain our Buy rating on OVV due to its improved FCF profile relative to its peers and the company's expected shareholder returns inflection to 50 percent or more of FCF (from 25 percent now) as the balance sheet strengthens."
Our analysts are similarly optimistic about OVV's expanding free cash flow, cash return to shareholders, and initiatives to reduce debt. In addition, the business "might make a somewhat accretive acquisition in the future months without significantly altering its shareholder return goals," he says.
In conclusion, OVV is a turnaround narrative that is beginning to turn. Therefore, the oil and gas stock's shares, up about 60 percent year-to-date, have plenty more outperformance left.
In fact, with an average price objective of $64.90, analysts assign OVV stock a potential upside of 22% over the next twelve months. S&P Global Market Intelligence reports that ten analysts rank OVV as Strong Buy, nine as Buy, and five as Hold. That amounts to a unanimous Buy recommendation with a reasonable amount of certainty.
8. Chesapeake Energy
Chesapeake Energy is a natural gas E&P business that has the highest upside potential among these oil and gas companies, according to UBS Global Research's list of Top Picks for 2022. This is due to rising natural gas prices and other factors.
Similar to PDCE, Chesapeake is profiting from strategic acquisitions. Early in March, the business concluded its $2.6 billion acquisition of privately held Chief E&D Holdings. This is the company's second significant purchase since late 2021. Moreover, it permits CHK to return even more cash to shareholders.
"Basic dividends will grow to 50 cents per share," writes Lloyd Byrne, an analyst at UBS (Buy). Remember that in January, CHK hiked its annual dividend by almost 14 percent to $2.00 per share while maintaining its $1 billion stock repurchase program. (The corporation also distributes variable dividends based on free cash flow after adjustments.)
Although favorable gas market conditions have driven CHK to a more than 45 percent year-to-date gain through April 15, experts believe it is still cheap. In fact, with an average price objective of $116.70, analysts see a 24 percent potential for CHK stock over the next year or so.
Therefore, it is not surprising that Strong Buy's analyst consensus rating is not incredible. Seven of the eleven analysts polled by S&P Global Market Intelligence cover the stock rated as a Strong Buy, three as a Buy, and one as a Hold.
9. BP
BP is a British oil and gas company whose top listing is on the London Stock Exchange. Since the Deepwater Horizon debacle, which has resulted in BP paying over $70 billion in fines since 2010, the company's performance on the stock market has been turbulent. Despite this, there are still justifications for BP's status as one of the best oil companies to purchase right now.
In the first place, BP has a P/E ratio of a little over 13 times. As a result, this may suggest that the oil stock is available at an attractive starting price. Second, as of this writing, BP offers a respectable dividend yield of almost 4.4%. During the last twelve months, BP stock has increased by 23 percent.
Compared to the oil and gas markets, this is below average. Moreover, BP shares have declined by roughly 15% over the past five years, which is very concerning. However, BP remains a significant role in the global oil industry, and as such, this stock may be worth a gamble at current pricing.
10. Chevron
Chevron was founded in 1879, making it one of the oldest oil corporations in the United States. In 2022, the company is currently functioning in more than 180 countries worldwide. In terms of its primary markets, Chevron is one of the oldest oil corporations in the United States, having been founded in 1879.
Chevron is exposed to practically all stages of the global oil supply chain, which comprises exploration, production, refining, and transportation. And due to its diversified business strategy, Chevron is one of the most significant companies to purchase when oil prices are down.
This oil stock has gained more than 57 percent over the past year in terms of recent performance. Chevon's stock price has increased by only 50 percent over the past five years, far below the market average. On the other side, we like that Chevron offers a dividend yield of 3.4% as of this writing. In addition, its P/E ratio of 20 is appropriate.
When Is the Best Time to Buy Oil Stocks?
Typically, after a pullback, the ideal time to purchase strong oil equities is after. Warren Buffett, a renowned investor, advises long-term investors to "be greedy when others are frightened." Before committing funds, it is essential to conduct thorough research on your chosen oil stock.
Notably, buy-and-hold investment in oil equities often avoids short-term market timing in the oil business. Seasoned investors understand how time and compound interest may work together to produce long-term benefits.
The 72 rule allows you to determine how soon your investment in oil stocks will double due to compounding. Divide the figure 72 by the yearly return percentage on an oil share. Suppose an oil stock is anticipated to yield 7 percent per year, including dividends. Therefore, it would take slightly more than ten years to double your oil industry investments.
Final Thoughts
Due to the global commodity prices, now might be an excellent moment to add the finest oil stocks to your portfolio. Not only are oil shares performing well, but firms in this industry often have a robust dividend program.
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