May 5, 2022
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The world is in the midst of an acute energy crisis.
The fact that a barrel of crude oil traded below $0 in early 2020 is now a distant memory. Brent crude and West Texas Intermediate are both comfortably above $100.
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There's a chance oil could stay above $100 for the rest of 2022 due to three things: Demand, supply, and production.
Demand for crude oil is rebounding as the global economy recovers — people are traveling and commuting again. Meanwhile, production has failed to meet that demand because producers have underinvested for nearly a decade. On top of that, sanctions on Russia have cut supply from one of the world’s largest energy exporters. Earlier this year, Goldman Sachs even called for oil prices to continue rising above $100 in 2023.
Here are three top oil stocks that benefit from those dynamics.
Chevron
Investment legend and Berkshire Hathaway CEO Warren Buffett recently revealed a massive stake in Chevron. In fact, the oil and gas gorilla is now Berkshire’s fourth-largest publicly traded holding.
Chevron is at the forefront of the energy boom. In 2021, it produced a total of over 1.8 million barrels of oil and natural gas liquids per day. Meanwhile, the company’s free cash flow has surged by more than 1,000% to $21.1 billion over the past year.
Currently, the stock trades at a price-to-cash flow ratio of 10. It also offers a healthy 3.5% dividend yield.
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Occidental Petroleum
Occidental Petroleum is another big energy bet in Buffett’s portfolio. The Oracle of Omaha added this new position at the start of 2022. Year to date, the stock is up about 97%, so it has worked out well for the billionaire.
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Occidental is the largest acreage holder in the highly coveted Permian Basin, with assets concentrated in West Texas and Southeast New Mexico. The company generates a healthy amount of free cash flow — $9.2 billion in 2021 — much of which gets handed back to investors in the form of dividends and buybacks.
OXY has already initiated a $2.5 billion buyback program to reward long-term shareholders. Currently, the stock trades at a still-cheapish price-to-cash flow of 5.
Exxon Mobil
Exxon Mobil is probably the best-known oil stock in the world — for good reason. As one of the largest energy producers in the world (and biggest in the U.S.), Exxon is the definition of a blue-chip giant.
In 2021, Exxon earned $23 billion and generated a whopping $48 billion in operating cash flow. Management also recently initiated a $10 billion share repurchase program.
The stock currently trades at a price-to-free cash flow ratio of 7. Meanwhile, Exxon’s dividend yield still sits at an attractive 4.1%. Investors looking for a solid way to lock in some passive income, while hedging against white-hot inflation, should keep an eye on XOM.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
