Stocks to buy

With crude oil prices zooming back above $80 per barrel, you may be wondering about the best oil and gas stocks to buy. A further rise in spot petroleum prices could spark a bigger rally in energy stocks, which have perked up after trending lower in early 2023.

Some may argue that oil’s latest rally, driven by surprise news of production cuts from OPEC+, will not last. Yet, several analysts have argued that, with the prospect of more preemptive supply cuts from OPEC+ and the rebound in demand from China, oil prices have more room to run.

If factors such as a further economic slowdown in the U.S. and Europe counter this, at the very least crude prices may be able to hold steady. Or energy stocks could continue to rally with the market re-rating the sector to a higher valuation as concerns about a drop back to pre-2022 oil prices diminish.

If you’re bullish on the sector, here are seven of the best oil and gas stocks to buy right now, which run the gamut from household names to under-the-radar plays.

EGY VAALCO Energy $4.93
EPM Evolution Petroleum $6.62
MRO Marathon Oil $25.69
OXY Occidental Petroleum $64.57
PBR Petroleo Brasileiro $10.87
STR Sitio Royalties $24.37
XOM Exxon Mobil $116.99

VAALCO Energy (EGY)

Source: Oil and Gas Photographer / Shutterstock.com

Before diving into some of the best large-cap oil and gas stocks to buy, let’s take a look at a smaller independent exploration and production (E&P) company. In addition to the recent rise in oil prices, Houston-based VAALCO Energy (NYSE:EGY) is appealing for three reasons.

First, EGY stock trades at a low valuation of 4.3 times earnings, and there may be a path to multiple expansion. As I’ve argued previously, VAALCO’s merger last year with Canada’s TransGlobe Energy made the company more geographically diversified. In time, this could result in investors re-rating the stock to a higher earnings multiple, somewhere in the mid to high single digits.

Second, even if multiple expansion isn’t in the cards, shares could still move higher in tandem with earnings growth stemming from cost-reduction synergies. Third, total returns could be boosted by EGY’s recently raised dividend, which gives it a forward yield of 5.5%.

Evolution Petroleum (EPM)

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Evolution Petroleum (NYSEAMERICAN:EPM) is another small independent E&P company. While this microcap energy stock doesn’t have a large following, plenty of investors seeking high yields have caught onto this opportunity.

The stock has a dividend yield of 7.1%. With a payout ratio of 36%, this payout is likely sustainable if energy prices hold up. But EPM’s above-average yield isn’t the only thing to be excited about. There is also the potential for a high level of price appreciation, irrespective of whether crude oil zooms back above $100 per barrel or trades sideways from here.

As stated in the company’s February investor presentation, management remains focused on maximizing shareholder value through its dividend and accretive acquisitions of high-quality, low-risk energy assets.

Marathon Oil (MRO)

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After looking at two smaller E&P names, let’s turn to a more familiar name that is among the best oil and gas stocks to buy. Marathon Oil (NYSE:MRO) bounced back in a big way during the 2021 oil recovery. It experienced a further boost when Russia’s invasion of Ukraine spiked oil prices in early 2022.

Since then, however, MRO stock has traded sideways. Yet, even as it may seem that oil and gas prices will need to revisit last year’s highs for Marathon to produce strong returns, that may not necessarily be the case.

MRO could still produce solid long-term returns through aggressive return-of-capital efforts. Last year, Marathon bought back 15% of its outstanding shares and raised its dividend three times. Management plans to continue returning at least 40% of its free cash flow to investors.

Occidental Petroleum (OXY)

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Occidental Petroleum (NYSE:OXY) has been making headlines lately, and not only because of the crude oil rally. As you may know, shares of this E&P giant have become a favorite of legendary investor Warren Buffett.

Buffett’s Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) has been an investor in OXY since 2019, when it purchased $10 billion in preferred stock. Since then, Berkshire has been buying up common shares of OXY stock. After its latest addition of shares last month, Berkshire owns a 23.5% stake in the company.

However, there’s more to OXY than merely riding Buffett’s coattails. Besides being one of the highest-quality oil stocks out there, Occidental also has a major “green” catalyst. Per Chief Executive Officer (CEO) Vicki Hollub, the company’s carbon capture business could be a major contributor to OXY’s bottom line a decade from now.

Petroleo Brasileiro (PBR)

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Petroleo Brasileiro (NYSE:PBR), better known as Petrobras, may not seem like one of the best oil and gas stocks to buy due to political uncertainties. The election of Luiz Inacio Lula da Silva (or Lula, for short) as Brazil’s president last year has weighed on shares of this state-controlled integrated oil company.

Early last month, pressure on PBR stock intensified, as Lula (a leftist, especially on economic issues) criticized Petrobras for its focus on dividends rather than on capital investments beneficial to Brazil’s growth. Yet, while jurisdictional risks are real with PBR, that doesn’t necessarily mean you should stay away.

Negative sentiment has pushed shares to a bargain-basement valuation of less than 2 times earnings. Management has also assured investors that the company will keep paying “robust” dividends. If you are aware of the risks, it may be worthwhile to take a small, speculative position.

Sitio Royalties (STR)

Source: Shutterstock

Sitio Royalties (NYSE:STR) is a high-yield stock that I’ve talked about glowingly in recent months. In a nutshell, this company is in the business of acquiring oil and gas mineral and royalty interests.

With management more focused on creating shareholder value than on building an energy empire, STR stock may be poised to produce strong returns if oil holds steady and especially if oil prices rally from here. Similar to the situation with Evolution Petroleum, Sitio is adept at making accretive acquisitions of energy assets. This could drive continued growth in cash flow.

Sitio will plow a portion of this cash flow back into new acquisitions, but a lot of it will come back to shareholders, primarily in the form of dividends. STR’s payouts are variable, but if oil prices continue to trend higher, chances are STR will continue to sport a double-digit dividend yield.

Exxon Mobil (XOM)

Source: Jonathan Weiss / Shutterstock.com

Exxon Mobil (NYSE:XOM) is perhaps the first oil stock that comes to mind not only for most investors but for the general public as well. Yet, there is more than just “buy what you know” at play when it comes to arguing for XOM being one of the best oil and gas stocks to buy.

For one, as InvestorPlace’s Louis Navellier has discussed, the venerable integrated oil giant is in the midst of an aggressive cost-reduction program. With cost savings falling straight to the bottom line, this stands to continue boosting the valuation of XOM stock. The increased cash flow will also fuel Exxon Mobil’s buyback and dividend efforts.

Not only that, as with Occidental, there’s a decarbonization catalyst in play too with XOM. In fact, CEO Darren Woods recently stated that its emerging decarbonization unit could start supplanting its legacy business a decade from now.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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