10 Best Oil Stocks to Buy Now for March 2022 InvestorPlace - Stock Market News, Stock Advice & Trading TipsThese are the best oil stocks to invest in now. COP, CVX, DVN, PSX, SLB and XOM can make great...
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InvestorPlace - Stock Market News, Stock Advice & Trading Tips
The Oil Industry
Oil has become a red-hot commodity. At time of writing, Brent crude, the global benchmark, is nearly $130. The last time global markets saw oil at triple digits was in 2014.
Russia's invasion of Ukraine was the catalyst behind the most recent surge in the price of oil. But the market had been restless for some time, in part due to increasing supply-and-demand imbalances. Now analysts debate if Brent can even go higher in the weeks ahead.
Since higher prices mean more revenue for oil companies, Wall Street has been piling up on oil stocks. So far this year, the Dow Jones U.S. Oil & Gas Total Stock Market Index is up almost 35%.
But, on the other side of the equation, I need to remind readers that oil stocks also remain susceptible to lower crude oil prices. Therefore, short-term volatility in the oil industry should persist.
Best Oil Stocks
Given the strength in the price of oil, investors are searching for the best oil stocks, seven of which I'll now introduce. I have chosen these oil shares as they mostly have increasing revenues, high margins and profits.
In addition, most of these oil companies offer passive income in the form of dividends. A number of oil firms increase their payouts regularly.
Those oil stocks on this list mostly have Wall Street's seal of approval. Therefore, whenever I can, I provide their 12-month median price forecasts and how the prices of these oil shares fared in recent months.
Fundamental valuation tools are also important when analyzing oil stocks. For instance, the price-to-earnings (P/E) ratio for the oil industry is 17. By comparison, the P/E ratio for the S&P 500 index, which serves as the barometer for U.S. stocks, is 35.
That said, here are seven of the best oil stocks to buy in March:
- Chevron (NYSE:CVX)
- ConocoPhillips (NYSE:COP)
- Devon Energy (NYSE:DVN)
- EOG Resources (NYSE:EOG)
- ExxonMobil (NYSE:XOM)
- Phillips 66 (NYSE:PSX)
- Shell (NYSE:SHEL)
Chevron (CVX)
San Ramon, California-based Chevron is the second-largest integrated energy company stateside, with a market capitalization of over $270 million. Earnings have benefited from higher commodity prices and better-than-expected production volumes.
CVX stock is up close to 47% year-to-date (YTD) and saw a record high in recent days. The forward P/E ratio is 14. The 12-month median price forecast for CVX stands at $152.
ConocoPhillips (COP)
ConocoPhillips is among the largest global independent exploration & production (E&P) businesses. In late 2021, the energy group made headlines when it acquired Shell's Permian Basin assets. COP's upstream operations are growing rapidly.
COP stock is up almost 39% this year and hit a record high in early February. Shares trade at 11 times forward earnings. Meanwhile, the 12-month median price forecast for COP stock is $109.
Devon Energy (DVN)
Devon Energy has operations across most major hydrocarbon basins stateside. The energy group ended Q4 with a free cash flow (FCF) of $2.9 billion, the highest level in the company's long history. Meanwhile, the board increased the dividend by 45%.
DVN shares change hands shy of $60, up 35% YTD. The stock trades at 10 times forward earnings. Currently, the 12-month median price forecast is $61.
EOG Resources (EOG)
EOG Resources is one of the largest shale producers in the Permian Basin. It posted Q4 financials that showed a record quarterly adjusted net income of $1.8 billion, or $3.09 per share.
EOG stock hovers around $119, up 34% YTD. It trades at 11 times forward earnings. With its valuable assets and low debt, EOG shares deserve your attention. The 12-month median price forecast for the oil stock is $126.50.
ExxonMobil (XOM)
With a market cap of roughly $330 billion, ExxonMobil is the largest oil supermajor stateside. Q4 earnings showed earnings of $8.9 billion, or $2.08 per share. Its cash flow of $48 billion from operating activities was the highest amount since 2012.
So far in year, XOM shares are up over 44%, currently changing hands around $90. Shares trade at 12 times forward earnings. And the 12-month median price forecast stands at $85.50.
Phillips 66 (PSX)
Phillips 66 is a diversified energy manufacturing and logistics heavyweight that also has oil refining stations. Q4 financials showed adjusted earnings of $2.94 per share. In 2021, the company paid out debts worth $1.5 billion. Now, Phillips 66 bulls note the healthy financial position.
So far in 2022, the stock has returned 18% and changes hands shy of $86. The forward P/E stands at 11. Meanwhile, the 12-month median price forecast for Phillips 66 is $100.
Shell (SHEL)
Our final stock, Shell, comes from the other side of the Atlantic. The oil and gas supermajor Shell explores, is also en route to become a low-carbon producer. SHEL stock formerly traded as RDS-A and RDS-B.
Shell shares are swapping hands at around $53, up 19% YTD. The stock currently looks cheap, trading at 8 times forward earnings. Meanwhile, the 12-month median price forecast for the stock is $64.50.
What Are Good Oil Stocks?
In addition to the seven oil stocks we have looked at, I want to introduce three other good oil stocks. Differentiating among the best in the oil industry is not an easy task.
Good, but not the best, oil stocks will usually have recent quarterly results that most investors did not love. These numbers typically include revenue, profit, cash glow levels, margins, debt levels and decisions regarding dividend payouts.
An oil company's balance sheet is usually a "snapshot" of it financial position at a particular point in the fiscal year. If there were an emergency, the oil company would need access to cash to fund operations. Therefore, investors typically penalize an oil stock if the balance sheet is not healthy.
In addition, fundamental valuation metrics for these good oil stocks could be richer than those of the best oil stocks. Many investors would not hit the "buy" button if an oil company's metrics, such as the P/E ratio, is a lot higher than the industry average.
Oil industry bulls can also be skeptical of a recent acquisition an oil company might have made. Such transactions typically mean taking on debt that creates vulnerabilities, especially in times of macroeconomic stress for the oil industry. The Street wants an oil firm to be liquid enough to meet its financial obligations when they come due in the months ahead.
Meanwhile, share prices for these good oil companies might have also come under pressure in recent weeks. Reasons could include short-term profit taking or lower-than-expected quarterly earnings.
Good Oil Stocks: Kinder Morgan (KMI)
Our next stock is the leading oil- and gas-pipeline group Kinder Morgan. It operates in four main segments: natural gas pipelines (the largest contributor to revenue), products pipelines, terminals and CO2.
In Q4, adjusted earnings came in at $609 million. A year ago, they had been $604 million. However, Wall Street was not impressed with the CO2 segment results, which suffered from lower sales.
KMI stock is around $19, up 18% YTD. It currently trades at 15 times forward earnings. Meanwhile, the 12-month median price forecast is $19.
Good Oil Stocks: Occidental Petroleum (OXY)
Occidental is another independent E&P company with global operations. In August 2019, Occidental completed the purchase of Anadarko Petroleum at a transaction valued at $55 billion. Analysts have been debating when the acquisition could start creating shareholder value.
OXY shares currently hover at around $55, up over 85% since January. It currently yields a dividend of 1%. Its forward P/E ratio stands at 14. Meanwhile, the 12-month median price forecast for OXY stock is $47.
Good Oil Stocks: Schlumberger (SLB)
Houston, Texas-based Schlumberger is the world's largest oilfield service player. The rising oil demand in recent months has put the company in the limelight. According to the company's Q4 financial metrics, revenue grew 13% YOY to $6.2 billion.
SLB stock recently hit a multi-year high and returned about 48% YTD. It is currently a bit over $44. Shares trade at 21 times forward earnings. The 12-month median price forecast for the energy stock is $44.50.
Are Oil Stocks Good Investments?
Yes, oil stocks are good investments for long-term investors and possibly deserve a place in a diversified portfolio. Oil shares typically offer the potential for both capital appreciation and passive income in the form of dividends.
However, in the short-run the industry is volatile. Like natural gas or coal, oil is a fossil fuel. Supply and demand dynamics affect prices of oil and thus oil shares. Thus, investors have to pay attention to numerous headlines in oil industry that range from macroeconomic developments, to geopolitical tensions and issues around climate change.
Therefore, market participants need to appreciate the risk/return profile of oil stocks before buying into the share price of an oil company. For most retail investors, short-term price swings can be unnerving. Like with all investments, further due diligence on target stocks and a personal approach to long-term portfolio construction are necessary.
Are Oil Stocks Value Stocks?
Yes, oil stocks are value stocks. As I have already noted, the P/E ratio of 17 for the oil industry is much lower than 35, the current P/E ratio for the S&P 500 index.
In long-term equity investing, one of the key classifications is value investing vs. growth investing. The risk and return profiles of value shares are typically quite different than those of growth shares.
When an oil stock is a value stock, its share price tends to be lower than the intrinsic value. For example, a value oil stock could be underpriced relative to its asset base or cash flows. Trailing or forward P/E ratios for oil stocks could be lower than that of the oil industry. Understandably, we can expand this stock-based analysis to the entire oil industry as well.
Are Oil Stocks Growth Stocks?
No, oil stocks are not growth stocks.
Growth stocks typically grow revenues, earnings or cash flows faster than their peers. Many technology stocks are growth shares. However, oil stocks are not typically considered growth stocks.
In the past decade, market participants have been willing to pay a premium for growth shares. But they also expect higher portfolio returns.
Nonetheless, I should remind readers that high returns typically mean higher degrees of volatility and risk, at least in the short-run. Therefore, readers interested in growth shares should research their chosen stocks and buy them for the long-haul.
When Are the Best Times to Buy Oil Stocks?
The best time to buy robust oil stocks is usually after a pull-back. Famed investor Warren Buffett recommends long-term investors to "be greedy when others are fearful." However, it is important to do due diligence on your chosen oil stock before committing your capital.
I should also note that buy-and-hold investing in oil stocks typically avoids short-term market-timing in the oil industry. Seasoned investors realize how compound interest and time can work together to create long-term gains.
The Rule of 72 helps you calculate how quickly your oil stock investment can double thanks to compounding. You simply divide the number 72 by the percent annual return in an oil share.
Let's say an oil stock is expected to return 7% a year, including the dividend payout. 72 divided by 7 is 10.29, so it would take slightly over ten years for your oil industry investment to double.
Oil Stock ETFs
Readers interested in buying oil stocks could also invest in exchange-traded funds (ETFs) that give access to oil stocks. Examples of such funds include:
- Energy Select Sector SPDR Fund (NYSEARCA:XLE)
- Invesco Dynamic Energy Exploration & Production ETF (NYSEARCA:PXE)
- Invesco S&P SmallCap Energy ETF (NASDAQ:PSCE)
- iShares U.S. Oil & Gas Exploration & Production ETF (BATS:IEO)
Which Oil Stocks Pay Dividends?
Most oil stocks are robust dividend payers. To review, here are the current dividend yields of our seven best stocks for today:
- Chevron (CVX): 3.5%
- ConocoPhillips (COP): 1.4%
- Devon Energy (DVN): 6.7%
- EOG Resources (EOG): 2.5%
- ExxonMobil (XOM): 4%
- Phillips 66 (PSX): 4.5%
- Shell (SHEL): 3.2%
On the date of publication, Tezcan Gecgil did not have (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.
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