Analyzing Three of the Best Oil Stocks

Capison Pang

The three best oil stocks to buy now include one of the largest midstream oil and gas companies in North America, a recycler of industrial waste and a high-growth oil and gas exploration and production company.

Despite increasing international attention towards renewable energy, oil remains the primary energy source worldwide. Petroleum supplies approximately 33.1% of global energy consumption. Oil production is projected to remain high for the foreseeable future, with demand peaking in 2029 and new drilling expected to continue for decades.

Oil stocks, especially large-cap corporations, are generally characterized as low risk, low reward, with many companies possessing high dividend yields. The cost of exploration, transportation and processing of crude oil creates a buffer against competitors and a barrier to expansion for many companies in the oil industry.

There are three broad segments in the petroleum industry: upstream, midstream and downstream. Upstream businesses explore and extract crude oil from the ground. Midstream companies transport and store crude oil. Downstream companies process the crude oil into usable, finished products, such as gasoline or motor oil. Many companies straddle multiple business segments, with the largest oil companies such as BP plc (NYSE:BP) or Chevron Corp (NYSE:CVX) possessing “integrated” operations across all three.

The ever-increasing focus on renewable energy has resulted in many oil companies becoming significantly undervalued. Petroleum stocks have become a must for nearly every portfolio. The best oil stocks offer individuals rare access to high potential, low-risk investments seldom found elsewhere. We have selected the three best oil stocks for you to buy now.

3 Best Oil Stocks to Buy Now: #3

PDC Energy Inc (NASDAQ:PDCE)

PDC Energy, Inc (NASDAQ:PDCE), founded in 1955, is an oil and gas (O&G) exploration and production company headquartered in Denver, Colorado. The corporation has a market capitalization (market cap) of $5.3 billion with operations in the Wattenberg Field in Colorado and the Delaware Basin in Texas.

Despite the decline of the coal industry in recent decades, O&G remains the largest source of energy production in the United States, accounting for 69% of total energy output in the country. Renewables remain a distant third at 12%. Globally, oil and gas production is projected to increase by 5.0% annually over the next five years.

On the surface, PDCE seems overpriced with a (share) price-to-earnings (P/E) ratio of 129.0 compared to the O&G exploration and production industry average of 25.8. The company also only possesses a dividend yield of 0.9%, despite operating in an industry known for its high dividend payments. However, a high trailing P/E ratio and a low dividend yield are small prices to pay for PDC Energy’s projected future growth.

Goldman Sachs analyst Neil Mehta forecasted in March 2021 that PDC Energy would produce $1.1 billion in free cash flow over the next two years, equivalent to a fifth of the company’s current total market cap.

In Q3 2021 alone, the company’s crude oil sales rose by 87%, its natural gas liquid revenue (NGLs) climbed by 209% and its natural gas sales jumped by 223%. PDC Energy’s charge upward is expected to continue with a 138.2% growth in revenue in Q4 2021 and a 53.7% increase in sales in 2022.

The company is also highly profitable, with a gross margin of 58.7% and an operating margin of 43.5% compared to the industry averages of 33.3% and 18.5%, respectively. As a result, PDCE’s P/E ratio is projected to drop significantly, from an industry high of 129.0 to a cheap 5.4 in the next 12 months.

PDCE is one of the best energy stocks available, boasting Stock Rover scores of 92/100 for sentiment and 88/100 for growth. As a testament to PDC Energy’s potential, the company has seen its share price surge by 140.9% over the past year. PDCE’s upward movement is shown below, along with a 50-day moving average.

Chart provided by Stock Rover.

PDC Energy does not utilize revolutionary technology or possess a history of flashy mergers and acquisitions. However, the company is highly effective and efficient at exploring and producing new oil and gas wells. At the end of Q3 2021, PDC Energy projected that it would spud 75 to 80 operated wells and turn-in-line 150 to 160 operated wells in Wattenberg Field by year’s end.

PDC Energy even instituted a major share buyback program in February 2021 to capitalize on its growth and success. PDCE has repurchased $168.0 million worth of shares by the end of Q3 2021. The company’s management has signaled willingness to pursue further share buybacks by announcing that $238.5 million worth of common stock remained available for repurchase. PDC Energy is a straightforward and undervalued O&G investment with high growth potential.

A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $66.75, 23.7% higher than its latest closing price of $53.97, earning PDCE a “STRONG BUY” recommendation from Stock Rover and a place among our three best oil stocks to buy now.

3 Best Oil Stocks to Buy Now: #2

Energy Transfer LP (NYSE:ET)

Energy Transfer LP (NYSE:ET) is a Dallas-based midstream oil and gas company founded in 2002. The company gathers, transports, processes and treats petroleum, natural gas and natural gas liquids (NGL) products. Energy Transfer has a market cap of $28.9 billion and owns and operates one of the largest networks of O&G pipelines in North America.

Midstream stocks are often forgotten amongst the upstream exploration companies and downstream refineries in the petroleum industry. However, midstream businesses are equally crucial. Midstream companies are responsible for storing and transporting the extracted crude oil to downstream refineries for processing into consumer products.

Midstream oil and gas businesses are excellent choices for individuals seeking mature investments with low volatility. The thousands of miles of pipeline and expensive storage facilities required to transport crude oil and natural gas to downstream refineries result in high entry barriers. As a result, many midstream O&G companies are great dividend investments as they possess the security to pay out a significant portion of their earnings to investors. ET is no exception, with a dividend yield of 6.7%.

In exchange for stability and high dividend payments, midstream O&G companies typically experience low growth. Over the last 10 years, the industry has seen an average annual sales growth of 1.5% and an average rate of return of 69.5%. However, Energy Transfer’s $7.2 billion acquisition of Enable Midstream Partners has broken the mold, positioning the company for rapid growth while maintaining stability. The two companies entered into a definitive merger agreement in February 2021.

The acquisition is expected to add 24,000 miles of pipeline and 84.5 billion cubic feet of storage capacity to Energy Transfer’s network while creating $100 million in annual cost synergies. The deal has allowed ET to expand its transportation network to 114,000 miles of pipeline across 41 states. The addition of Enable’s network is projected to boost Energy Transfer’s financials significantly. The company has already seen its sales climb by 50.9% over the past year and is forecasted to experience an additional 68.8% year-over-year growth in Q4 2021.

ET has seen a 40.6% increase in share price over the past 12 months. The graph below depicts ET’s growth alongside a 50-day moving average.

Chart provided by Stock Rover.

Despite its recent surge, ET is still one of the most undervalued companies in the midstream O&G space, with a Stock Rover value score of 99/100. The company possesses a P/E ratio of 5.1, a (share) price-to-sales (P/S) ratio of 0.4 and a (share) price-to-book (P/B) ratio of 1.1, all below industry averages of 20.7, 1.5 and 2.0, respectively. Energy Transfer’s purchase of Enable will only increase the company’s value relative to its competitors even further.

By expanding its pipeline network, Energy Transfer has increased its addressable market size, while raising the barrier to entry for potential competitors. Additionally, the acquisition was an all-stock deal meaning the company did not have to issue debt or reduce its balance sheet cash. Energy Transfer’s purchase of Enable has created a rare, high-growth, low-risk investment opportunity.

A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $19.50, 292.4% higher than its latest closing price of $4.97, earning VTNR a “STRONG BUY” recommendation from Stock Rover and a place among our three best oil stocks to buy now.

3 Best Oil Stocks to Buy Now: #1

Vertex Energy Inc (NASDAQ:VTNR)

Vertex Energy Inc. (NASDAQ:VTNR), headquartered in Houston, Texas, is an industrial waste recycling company with three business segments: refining and marketing, black oil and recovery. The company collects used oil from businesses and re-refines it into various petroleum products. Vertex Energy, founded in 2001, currently possesses a market cap of $314 million.

Renewable energy is undoubtedly the future. Every hour, 430 quintillion joules worth of sunlight energy strikes the Earth, providing enough to power all of human society for more than a year. However, it is expected to take decades for renewable energy to phase out fossil fuels entirely. The U.S. Department of Energy estimates that 76% of American energy consumption will still be supplied by fossil fields in 2050.

Global renewable energy production is set to increase by 35 gigawatts from 2021 to 2022. However, worldwide energy demand is projected to grow by 100 gigawatts over the same period, requiring traditional fossil fuels to fill the gap. Even as recent climate talks in Glasgow, Scotland, capture media attention worldwide, the global petroleum industry is quietly increasing production to meet growing energy demands.

Despite an eagerness from many corporate and world leaders to transition away from fossil fuels, renewable energies simply cannot meet current demand. As a result, an increasing focus has been placed on reducing the carbon footprint of current fossil fuels.

Leftover petroleum is one of the greatest culprits of fossil fuel pollution. In fact, 1.3 billion gallons of waste oil is produced annually in the United States alone. A single gallon of improperly disposed petroleum can contaminate a million gallons of freshwater. The solution lies in industrial recycling companies like Vertex Energy. Recycling used oil would save the United States 1.3 million barrels of petroleum per day.

Since oil does not expire, re-refining petroleum is also more energy-efficient and cost-effective than refining crude oil. Recycling one gallon of used motor oil produces the same amount of lubricant as processing and refining 42 gallons of crude oil while simultaneously reducing disposal costs. As a result, the global waste oil market has reached $63.4 billion and is forecast to balloon to $95.3 billion by 2028.

Vertex Energy has capitalized on petroleum recycling’s appeal. Over the last five years, the company has seen an average annual sales growth of 14.1% and a 288.3% rate of return. Both figures are significantly higher than the industry averages for O&G refining and marketing, at 2.9% and 32.9%, respectively. However, company revenue is projected to skyrocket in the coming months as petroleum production increases as the global economy and supply chain recover from COVID-19.

The company is expected to see a 1,149.8% increase in revenue in 2022, including 744.2% growth in Q1 2022. As a result, VTNR has seen its share price rise by 513.6% over the trailing 12 months, displayed below alongside a 50-day moving average.

Chart provided by Stock Rover.

Vertex Energy has caused some investor concern over its plan to raise approximately $155 million in debt in the coming months to fund future growth. However, Vertex Energy currently possesses a debt-to-equity ratio of 0.6 and an interest coverage ratio of 21.9, making its capital raise a very manageable endeavor.

Vertex Energy is also set to purchase Royal Dutch Shell’s (NYSE:RDS.A) petroleum fuel and renewable diesel refinery in Mobile, Alabama, for $75 million, making VTNR an excellent stock for those seeking diversified energy investments.

A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $19.50, 292.4% higher than its latest closing price of $4.97, earning VTNR a “STRONG BUY” recommendation from Stock Rover and a place among our three best oil stocks to buy now.

Capison Pang is an editorial intern who writes for www.stockinvestor.com and www.dividendinvestor.com.

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