In what could be a boon for the best oil stocks to buy now, OPEC+ agreed to cut crude production by 2 million barrels a day.
The move represents the largest reduction in output by the Organization of the Petroleum Exporting Countries and its allies since the height of COVID-19 lockdowns in 2020. OPEC’s move is intended to halt a slide in energy prices caused by rising fears of global recession.
If nothing else, today’s OPEC decision is a win for Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK.B (opens in new tab)), and all the other oil bulls who have been running the risk of “fighting the Fed.” Buffett is betting big on Occidental Petroleum (OXY (opens in new tab)), with Berkshire Hathaway now controlling more than a fifth of the integrated oil and gas firm’s common shares outstanding.
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Including warrants and preferred shares that could be converted to common shares, BRK.B’s stake in OXY theoretically comes to around 35%. Berkshire last month received regulatory approval to acquire up to 50% of Occidental Petroleum, fueling speculation that Buffett could be eyeing a buyout of the entire company.
Buffett is supposedly attracted to OXY, at least in part, because oil is a hedge against inflation. But hawkish central banks are moving aggressively to halt the march of fast-rising prices, risking recession – and demand for oil – in the process.
OPEC slashing output acts as a countervailing force to those recessionary fears. But with OXY having more than doubled for the year-to-date, analysts, as a group, aren’t enthusiastic about the name. In fact, OXY gets a consensus recommendation of Hold, according to S&P Global Market Intelligence, with analysts citing valuation as a primary concern.
With that as our starting point, we decided to screen the S&P 500 for oil exploration and production stocks that Wall Street views more favorably than OXY. Indeed, based on consensus recommendations and implied upside to average target prices, these are the three best oil stocks to buy now, according to industry analysts.
The best oil stocks are listed by strength of analysts’ consensus recommendations – from weakest to strongest – on a scale where 1.0 equals Strong Buy and 5.0 equals Strong Sell. Thus, lower scores are better. Data is courtesy of S&P Global Market Intelligence, as of Oct. 4, 2022.
3. ChevronMarket value: $308.6 billionDividend yield: 3.6% Analysts’ consensus recommendation: 2.07 (Buy)Chevron (CVX (opens in new tab), $157.63) has the dual distinction of being the only representative of the energy sector in the blue-chip Dow Jones Industrial Average and one of Warren Buffett’s top stock picks.
Berkshire Hathaway owns 161.4 million shares in the integrated energy major, or 8.3% of CVX’s shares outstanding. And make no mistake, this is a heck of a bet: Buffett’s holding company is Chevron’s second-largest investor after asset management giant Vanguard. Moreover, at 7.5% of the Berkshire Hathaway equity portfolio, Chevron is Buffett’s fourth-largest holding.
Analysts give CVX a consensus recommendation of Buy, with fairly high conviction. Of the 29 analysts issuing opinions on the stock tracked by S&P Global Market Intelligence, 11 rate it at Strong Buy, six say Buy, 11 call it a Hold and one has it at Sell. Their average target price of $176.98 gives CVX stock implied upside of about 12% in the next 12 months or so.
Add in the dividend, and the implied total return comes to nearly 16%. That’s the kind of potential upside one expects from the best oil stocks to buy now.
Among the bulls, Wells Fargo Securities analyst Roger Read rates CVX at Overweight (the equivalent of Buy), citing the company’s “track record of negotiating the extended commodity price volatility since 2014, navigating through the challenging COVID-era while preserving balance sheet strength and making adroit acquisitions, delivering on cash returns to shareholders via dividends and share repurchases, making progress on GHG reductions and delivering modest but consistent growth.”
2. ConocoPhillipsMarket value: $147.2 billionDividend yield: 1.7%Analysts’ consensus recommendation: 1.67 (Buy)Shares in ConocoPhillips (COP (opens in new tab), $115.62) are up a whopping 60% so far in 2022 and analysts say they still have room to run.
“We continue to believe that a company’s balance sheet strength and place on the cost curve are critical, and favor those exploration and production companies that are well positioned to manage a potentially long period of volatile oil prices,” writes Argus Research analyst Bill Selesky (Buy). “We believe that COP is one of these companies.”
Selesky and other COP bulls emphasize the company’s size, scale and combination of “both long-cycle and unconventional short-cycle projects.” ConocoPhillips’ record of “disciplined investment, strong free cash flow and consistent returns of cash to shareholders through dividends and stock buybacks” also supports the Buy case for long-term investors.
And, like many of the best oil stocks to buy now, COP shares still look relatively cheap. Uncertainty regarding the future course of oil prices has COP stock changing hands at just 8.3 times analysts’ 2023 earnings per share (EPS) estimate. That’s quite a bargain when compared against the stock’s five-year average of 22.3 times projected EPS, per Refinitiv Stock Report Plus.
Furthermore, a bit more than eight times expected earnings is an attractive multiple to pay for a company forecast to generate average annual EPS growth of 14.3% over the next three to five years.
With that as the backdrop, it should come as no surprise that bullishness abounds on the Street. Of the 27 analysts issuing opinions on COP tracked by S&P Global Market Intelligence, 13 call it a Strong Buy, 10 rate it at Buy and four have it at Hold.
With an average target price of $123.25 and dividend yield of 1.7%, the Street gives COP an implied 12-month total return of not quite 10%.
1. Diamondback EnergyMarket value: $23.6 billionDividend yield: 5.2%Analysts’ consensus recommendation: 1.63 (Buy)Diamondback Energy (FANG (opens in new tab), $136.30) is an independent oil and natural gas company with production focused in the Permian Basin of West Texas. Shares popped on the OPEC news, giving them a year-to-date price gain approaching 30%.
As impressive as that might sound, FANG is actually a sector laggard. The S&P 500’s energy sector is sitting on a YTD price gain of about 47%. But analysts say FANG’s relative underperformance just sets it up for more outsized gains ahead. With an average target price of $171.67, the Street gives the stock implied price upside of nearly 30% in the next year or so.
Throw in the dividend, and the implied 12-month total return tops 35%.
Bulls cite FANG’s compelling valuation – and management’s commitment to returning cash to shareholders through buybacks and dividends – as reasons to be constructive on the name.
On the former point, shares do look cheap. FANG trades at just 5.5 times analysts’ 2023 EPS estimate, even as the Street forecasts the company to generate average annual EPS growth of 14% over the next three to five years.
Meanwhile, no one is quibbling with Diamondback’s capital plan as it pertains to investors.
“Management is committed to returning more than 75% of free cash flow to shareholders, with buybacks and variable dividends supplementing the growing base dividend,” writes Susquehanna Financial Group analyst Biju Perincheril, who rates shares at Positive (the equivalent of Buy).
Of 30 analysts issuing opinions on FANG, 15 rate it at Strong Buy, 11 say Buy and four call it a Hold. That sort of conviction solidifies Diamondback Energy’s status as one of the best oil stocks to buy now.