3 Energy Stocks to Buy on the Dip While most of the market has been mired in a brutal correction, energy stocks have had a very mild pullback. Investors should consider buying a high-quality energy stock like Ovintiv...

While most of the market has been mired in a brutal correction, energy stocks have had a very mild pullback. Investors should consider buying a high-quality energy stock like Ovintiv (OVV), Occidental Petroleum (OXY), and VAALCO Energy (EGY) as the underlying fundamentals keep improving.

Over the last month, we have experienced a major selloff across nearly every asset class. The S&P 500 is down by 9.4%, while bonds are also down evidenced by the 6% drop in the iShares 20+ Yr Treasury Bond ETF (TLT).

In the commodity complex, the picture is more mixed. Gold is down by 8%. There is also weakness in industrial metals with copper down by 15% and underperformance in steel and iron ore stocks. One exception is crude oil which is higher over the last month.

Crude oil's strength is impressive given that China's economy is shut down and speaks to its bullish fundamentals. When this returns, it could be the next catalyst for oil prices. Even with some increased recession concerns, travel demand and miles driven remain strong. On the supply side, companies continue to pay off debt or buy back shares rather than invest in new production.

Until we see a meaningful response on the supply side, investors should continue buying the dip in energy stocks. Here are 3 to consider: Ovintiv (OVV), Occidental Petroleum (OXY), and VAALCO Energy (EGY).

Ovintiv (OVV)

OVV is a North American independent oil and gas E&P with core assets in the Permian, Eagle Ford, Montney, and Duvernay resources. These are considered to be the shale properties with the most favorable drilling economics. Thus, it's not surprising that OVV has been one of the best-performing stocks over the past year with a 73% gain.

Following the buyout of Newfield Exploration, OVV is one of the largest upstream companies in North America. It also has a nice mix of oil and gas as both assets are quite strong on a year-over-year basis. Its primary sources of production are the Montney in British Columbia and Alberta, Anadarko Basin in Oklahoma, and the Permian Basin in New Mexico.

Over the past year, the company has aggressively reduced costs and paid off debt which has put it in a much stronger financial position. The company is also returning cash to shareholders via buybacks and dividends. It recently announced a 25% increase in its dividend and boosted its buyback to $1 billion in 2022 which equates to 9% of its total market cap. It's also projected to earn about $2.5 billion in free cash flow in 2022 which could increase with higher oil and natural gas prices.

OVV has an overall grade of B, translating into a Buy rating in our POWR Ratings system. The company has a Value Grade of B which isn't surprising, with a forward P/E of 3.4 and low amounts of debt. Click here to see OVV's complete POWR Ratings including component grades for Growth and Momentum.

Occidental Petroleum (OXY)

OXY is a North American, independent oil and gas exploration and production company. It operates through three segments: Oil & Gas; Chemical and Marketing; and Midstream. In addition to oil and gas, the company also produces basic chemicals, petrochemicals, and specialty chemicals.

OXY has been one of the big turnaround stories of this energy bull market as the company was flirting with bankruptcy early in 2020 due to its heavy debt load and purchase of Devon Energy. Now, this aggressiveness is paying off as the price of oil and natural gas rocket higher.

Maybe the ultimate validation is that Warren Buffett has been an aggressive buyer of the stock. Currently, Berkshire owns 15% of the company, about $7.5 billion which makes it the ninth-largest holding for Buffett. And, it fits with his other investments in energy as he bought utilities and midstream assets in 2020 with his purchase of Dominion Energy (D).

Adding to its positive momentum, OXY has been on an impressive streak of reporting blowout earnings. In its last quarter, it topped analysts' earnings expectations for the fourth straight quarter with $2.12 in EPS vs $1.97 per share. Revenue also topped expectations at $8.5 billion vs $8.3 billion. These figures were major improvements of last year's Q1 which had a $0.15 per share loss and $5.4 billion in revenue.

Of course, these figures should improve next quarter due to higher prices. It's also the largest holder of land in the Permian Basin which makes its outlook particularly appealing for investors who believe the energy bull market is in its early innings.

The POWR Ratings also reflect this positive outlook. The company has an overall grade of B, translating to a Buy rating. OXY's Momentum Grade of A is consistent with the stock's strong performance even amid a volatile market environment and the recent pullback in oil prices. Click here to see the complete POWR Ratings for OXY including grades for Growth and Value.

VAALCO Energy, Inc. (EGY)

EGY is an independent oil and gas explorer, developer, and producer. The company holds the Etame production sharing contract in the Etame Marin block in the Republic of Gabon and has interests in the undeveloped offshore block in Equatorial Guinea.

Given its foreign and offshore locations, EGY is certainly a higher-risk investment than OXY or OVV. Further, it has a higher cost of production, and many of its untapped reserves are only viable at higher prices.

Thus, the stock will likely outperform its peers if oil and gas prices plateau at even higher levels but will likely underperform if oil prices can't sustain average prices over $100 per barrel.

However, the company is very profitable at current prices. In its last earnings report, the company made $77.6 million in revenue and produced about 8,050 barrels per day and $45 million in EBITDA. Next year, the company is projected to earn $88 million in net income which makes its current market cap of $342 million quite attractive.

Equally important, management discussed some operational improvements that could lead to more production and lower costs in the coming quarters. It also was able to increase the amount of its SEC-approved reserves by 250% and expects about a 38% increase in the number of barrels produced on an annual basis.

This combination of rising oil prices and increased production is leading to an earnings boom and a strong bull market in the stock. The POWR Ratings are also bullish on the stock as it has a B rating which translates to a Buy. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500's average annual gain of 8.0%. Click here to see more of EGY's POWR Ratings.

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EGY shares . Year-to-date, EGY has gained 104.30%, versus a -15.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini's background, along with links to his most recent articles.

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