Oil stocks rose on Wednesday morning after OPEC and its allies announced plans to cut production by 2 million bpd, which is effectively the biggest cut since the pandemic hit in late 2019.
OPEC+ started increasing production quotas in June 2021, gradually increasing supply by an extra 400,000 b/d onto world markets every month with demand for crude beginning to recover. OPEC+ reduced its output by 100,000 barrels per day in September; however, it has never implemented an output cut that big in such a tight market, with demand remaining resilient and inventories at historically low levels. Indeed, Goldman Sachs says such a dramatic cut is likely to push oil prices back to triple-digits over the next three months.
Here are three energy stocks to keep on your radar.
1. Devon Energy Corp
Market Cap: $39.4B
YTD Returns: 48.3%
Early in the year, BofA Analyst Doug Leggate advised investors to focus on oil companies with potential to grow their free cash flows through consolidations or other cost reduction measures, naming Devon Energy (NYSE: DVN), Pioneer Natural Resources (NYSE: PXD), and EOG Resources (NYSE: EOG).
Devon fits that playbook to a tee.
DVN stock has been one of the best-performing energy stocks thanks to strong earnings and continuing cost discipline including a variable dividend structure.
Following the merger with WPX Energy last year, the company announced fixed-plus-variable dividends, something that has gone down well with Wall Street. In the second quarter, Devon paid out up to 50% of free cash as a variable dividend, bringing the total dividend to $1.55 per share. The stable portion has been indifferent, currently yielding slightly more than 1%. But if the latest convertible payout is a sign of the future, shareholders could receive closer to 10% overall.
Some Wall Street analysts had earlier pointed to the potential for DVN to sport a dividend yield of as high as 8% by year-end. Devon has already exceeded that, and now sports a juicy 9.7% estimated forward dividend yield.
Market Cap: $64.1B
YTD Returns: 106.3%
Houston-based Occidental Petroleum Corporation (NYSE: OXY) together with its subsidiaries, engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, Africa, and Latin America. The company also owns a solid petrochemical segment.
Back in May, Ecopetrol (NYSE: EC) announced an agreement to develop four deepwater blocks off the coast of Colombia with Occidental Petroleum. Ecopetrol revealed that it will take a 40% stake in the blocks while Occidental subsidiary Anadarko Colombia will have a 60% stake and will serve as operator.
But what has investors most excited about this is Warren Buffet’s big bet on it. Earlier this month, Buffett added another 5.99 million shares of OXY to his portfolio, and there seems to be no halting his buying spree. Since July alone, Buffet has added more than 20 million new shares to its portfolio.
Should you buy just because Buffet is all over this one? Well, perhaps. OXY ‘s Q2 earnings beat estimates with record profits, earning $3.16 per share–which represents an astounding 888% YoY increase. The company also reported an over 80% increase in revenue, with sales jumping 56% in Q1.
When OXY reports its Q3 earnings in November, anyone deep into the oil patch will be watching closely. Of course, much of Q2’s gains were thanks to high oil prices, but Wall Street is already targeting estimates of another $2.68 earnings per share, adding an over 200% gain to Q2’s 888% gain.
Marathon Oil Corp.
Market Cap: $15.3B
YTD Returns: 48.0%
Giant oil refiner Marathon Oil (NYSE:MRO) operates as an independent exploration and production company in the United States and internationally. The company engages in the exploration, production, and marketing of crude oil and condensate, natural gas liquids, and natural gas; and the production and marketing of products manufactured from natural gas, such as liquefied natural gas and methanol. It also owns and operates 32 central gathering and treating facilities; and the Sugarloaf gathering system, a 42-mile natural gas pipeline through Karnes and Atascosa Counties. The company was formerly known as USX Corporation and changed its name to Marathon Oil Corporation in December 2001. Marathon Oil Corporation was founded in 1887 and is headquartered in Houston, Texas.
Marathon Oil posted Q2 Non-GAAP EPS of $1.32, beating the Wall Street consensus by $0.04 while revenue of $2.3B (+101.8% Y/Y) beat by $190M. For the full year 2022, the company raised equity income guidance to a new range of $520M to $560M.
What you need to understand about Marathon is that it only operates upstream, so betting on Marathon is much more of a bet on oil prices. The doubling of its revenue in YoY in Q2 was pretty much the direct result of soaring oil prices. So, adding Marathon to your portfolio means a bet on crude oil prices in an incredibly volatile market.
By Alex Kimani for Oilprice.com
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