Three Oil and Gas Stocks to Buy as Energy Prices Rise

Three oil and gas stocks to buy as energy prices climb offer investors a way to profit as they pay increased amounts for fuel at the pump.

The three oil and gas stocks to buy received early support as earnings season entered its early days for such companies. U.S. oil and refiners are showing enough to signal some investment opportunities, according to BofA Global Research. 

The “rate of change” is a critical theme driving relative stock performance for standouts such as Denver-based Ovintiv Inc. (NYSE: OVV), a producer of petroleum natural gas and natural gas liquids, BofA wrote in a recent research note. Ovintiv’s early results from its acquisition of properties are spurring enhanced productivity.

Three Oil and Gas Stocks to Buy: Ovintiv Inc. (NYSE: OVV)

BofA set a price objective for Ovintiv of $62, or $84CN, assuming $80 Brent and $75 WTI long-term prices. The investment firm is predicting long-term Henry Hub natural gas prices of $4.25. Henry Hub is a natural gas pipeline in Erath, Louisiana, serving as an official delivery location for futures contracts on the New York Mercantile Exchange (NYMEX).

The investment firm applies a long-term, post-tax weighted average cost of capital (WACC) of 9.7% that is based on the BofA strategy team’s assumed risk premium and a five-year monthly beta. But risks exist that could thwart Ovintiv from achieving the $52 price objective.

The risks include the oil and gas price and margin environment, significant delays to the new upstream projects critical to the company hitting its production targets and potential excess cost pressures from operating expenses, capital expenditures and taxes. Other key risks are possible currency challenges and certain Midland Basin assets closing by mid-2023.

However, a chance to outperform the forecast exists, too. That path might include potentially improving the company’s cost of capital as Ovintiv deleverages its balance sheet, along with a possible increase in oil and gas prices. BofA rates Ovintiv as a buy.

Chart courtesy of www.stockcharts.com

Three Oil and Gas Stocks to Buy: Exxon Mobil (NYSE: XOM)

Exxon Mobil (NYSE: XOM), a multinational oil and gas company in Irving, Texas, appears to be on a growth trajectory, according to BofA’s recent research note. The investment firm placed a buy rating and a price objective of $145 per share on ExxonMobil, based on expected prices of $80 Brent and $75 WTI long-term.

The forecast also assumes long-term Henry Hub natural gas prices of $4.25. The outlook is based on a long-term, post-tax weighted average cost of capital (WACC) of 7.7%. The BofA strategy team assumed a risk premium and a five-year monthly beta.

Key risks to XOM attaining the price objective set for it by BofA include the oil and gas price and margin environment, any significant delays to new upstream projects that are “critical” to the country’s growth and possible inability to capture the price environment due to cost pressures. Potential outperformance could come from increased oil and gas prices, the investment firm added.

Chart courtesy of www.stockcharts.com

The top holding in the Energy Select SPDR (XLE) exchange-traded fund is Exxon Mobil, said Bob Carlson, who leads the Retirement Watch investment newsletter. Carlson, who further serves as a pension fund chairman, noted that energy stocks are climbing amid rising prices. XOM accounted for 21.16% of XLE’s holdings, as of the close of trading on Aug. 7. 

Paul Dykewicz interviews Retirement Watch leader Bob Carlson.

Jim Woods, who leads investment advisory services, personally recommends Exxon Mobil in the Income Multipliers portfolio of his Intelligence Report investment newsletter. Woods, who also heads the Successful Investing investment newsletter, as well as the Bullseye Stock Trader and High Velocity Options advisory services, has produced profitable returns on his XOM recommendation for his Intelligence Report subscribers.

Paul Dykewicz meets with Jim Woods, head of Intelligence Report.

Three Oil and Gas Stocks to Buy: Portia Capital’s Pick

Michelle Connell, who heads Dallas-based Portia Capital, also favors XOM. One of the reasons is that Exxon Mobil’s management recognizes the need to include alternative energy in its portfolio, she added.

Just last month the company announced the acquisition of Denbury, a $4.9 billion Dallas company that focuses on carbon capture and oil recovery, Connell continued. The purchase will help smooth out the seasonality of XOM’s cash flow/revenue, she added.

“The company will benefit from large tax incentives by participating in this green energy segment,” Connell counseled. “In the last few years, the company has been focusing on lowering its costs of its headquarters and personnel. This has included a move up at headquarters from Houston to the Dallas Metroplex. It has also included the lowering or paying down of the company debt. This is expected to continue over the next several years.”

Michelle Connell heads Portia Capital.

With the reduced debt, Exxon Mobil’s balance sheet is strengthening. The company has “strong” free annual cash flow of $5 billion, Connell commented. It also has a dividend yield of 3.4% that is expected to increase to 4% during the next 3-4 years, she added.

Bargain hunters should note that the “stock is cheap,” Connell told me. In the next 12 months, it could have upside of more than 40%, Connell continued.

“It’s current PE is 8.6,” Connell said. “It’s average PE is 17 times. It’s gross margins are now 28%. As recently as 2020, gross margins were only 4%.”

Three Oil and Gas Stocks to Buy: Chevron (NYSE: CVX)

Chevron (NYSE: CVX), of San Ramon, California, is the second-largest energy company in the United States. It also is rated as a BofA “buy.” However, its growth is not keeping pace with XOM, the investment firm wrote.

CVX is the second-largest holding of Energy Select SPDR, with 18.58% of the fund’s assets, according to Morningstar. Chevron offers a current dividend yield of 3.8%.

Chevron recently released an update to its senior management team. A “surprise” early retirement led to the departure of Chief Financial Officer Pierre Breber and the promotion of Eimear Bonner from chief technology officer to CFO. Another change is the waiver of the mandatory age requirement of 65 for the chief executive officer. The relaxation of that policy will allow 62-year-old CEO Mike Wirth to continue his tenure beyond that age within three years. Another notable move in the executive suite involves Frank Mount, the vice president of mergers and acquisitions, becoming the head of business development.

Chart courtesy of www.stockcharts.com

Three Oil and Gas Stocks to Buy Face Limited Political Risk from Russia’s War

The three oil and gas stocks to buy should not incur any major political risk from Russia’s ongoing war with Ukraine. One recent development of importance is that a Ukrainian maritime drone reportedly struck a Russian oil tanker on Saturday, Aug. 5. 

The attack damaged the tanker’s engine room, according to Russian state media. The previous day, a Russian warship was hit in a maritime drone attack.

Russia attacked the eastern Ukrainian city of Pokrovsk on Monday, Aug. 7, in an apparent plot to target rescue workers and first responders. Ukrainian officials called the incident a “potential war crime.” Seven confirmed dead from the attack included five civilians, an emergency worker and a service member, Ukrainian officials said.

The first responders came upon the scene to help victims following a strike from a short-range ballistic missile that hit what Ukraine’s President Volodymyr Zelensky called an “ordinary residential building” in the eastern Ukrainian city’s center. The three oil and gas stocks to buy should not be vulnerable to fallout from the attacks taking place in the Black Sea that traditionally has been a route for transporting goods from both Ukraine and Russia.

Paul Dykewicz, www.pauldykewicz.com, is an award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.