EC The Top 10 Oil Stocks For Rising Oil Prices

Occidental has promising growth prospects. It has doubled its production in the Permian Basin in the last three years and expects to double it again in the area over the next five years, from 300,000 to 600,000 barrels per day. Occidental expects to grow its total output by 9%-11% this year and 5% per year beyond this year. As we expect oil prices to rise from their current suppressed level in the upcoming years, we expect Occidental to grow its earnings per share by about 8.4% per year over the next five years.

Moreover, Occidental recently acquired Anadarko after it prevailed in a bidding war against Chevron. Occidental pursued this acquisition in order to strengthen its already strong presence in Permian and in the Gulf of Mexico.

OXY Portfolio

Source: Investor Presentation

The combined company will be the largest producer in the Permian Basin and the fourth-largest producer in the Gulf of Mexico. In addition, thanks to the great fit of the assets of the two companies, Occidental expects to achieve $3.5 billion of pre-tax annual synergies.

On the other hand, Occidental paid $38 billion for this acquisition. This amount is almost equal to its current market cap of $43 billion. Consequently, the market fears that the acquisition is too large for the company to assimilate. Moreover, as Chevron offered only $32 billion, there are concerns that Occidental overpaid for this deal. Furthermore, its debt load and its interest expense will greatly increase. All these concerns have resulted in a dramatic sell-off of the stock to a new 12-year low.

However, we believe that the market has punished the stock to the extreme. Occidental has grown its dividend for 17 consecutive years and is now offering a 7.0% dividend yield. As its cash flows are sufficient to support its capital expenses and its dividend, the latter is safe for the foreseeable future. We just expect the company to raise its dividend marginally in the upcoming years in order to reduce its debt load.

Occidental is now trading at a price-to-earnings ratio of 12.9, which is lower than its 10-year average of 13.8. If the stock reverts to its average valuation level over the next five years, it will enjoy a 1.4% annualized gain in its returns. Given also its 7.0% dividend and our expected 8.4% annual earnings-per-share growth, the stock is likely to offer a 16.8% average annual return over the next five years.

Investors should note that Occidental is highly leveraged to the oil price thanks to two factors, namely its upstream nature and the high interest expense that has resulted from its major acquisition. The higher the oil price the faster the company will reduce its interest expense and the richer the valuation it will earn from the market thanks to its reduced perceived risk. Those who expect higher oil prices in the future will be highly rewarded by Occidental if they are proven correct.

Top Oil Stock #1: Halliburton (HAL)

Halliburton is one of the world’s largest providers of products and services to the energy industry. It has operations in more than 80 countries and generates 60% of its revenues in North America.

Halliburton is suffering from the same headwinds as Schlumberger. North American oil producers have tightened their budgets and try to operate within the limits posed by their cash flows. Even worse, thanks to the great technological advances that have taken place in recent years, oil producers extract more oil from a given number of wells, at a lower cost.

Source: Investor Presentation

Due to these headwinds, Halliburton is trading at a 10-year low, just like Schlumberger. In late July, Halliburton reported (7/22/19) financial results for the second quarter of fiscal 2019. Revenue in North America remained weak due to cautious spending from shale oil producers. As a result, revenue in the region fell 13% over last year’s quarter.

However, international activity remained strong, with revenue increasing 12.5%. The great divergence between North America and International markets can be explained by the wide discount of WTI to Brent. Moreover, as most shale oil producers sell their oil at a discount to WTI, they face an even wider discount to Brent.

As international strength offset the weakness in North America, adjusted net income soared 50%, while adjusted EPS increased 52% for the quarter.

Management reiterated its expectations for high single-digit revenue growth in international markets for the full year. Moreover, it stated that it idled unused fracking equipment in an effort to reduce operating expenses and cut 8% of its North American workforce.

Despite the headwinds, we expect Halliburton to improve its performance thanks to our expectation for the boom in the U.S. oil production to last for several more years. We thus expect the company to grow its earnings per share from $1.40 this year to about $3.00 by 2024 for a 16.5% annualized growth rate.

Moreover, the stock is trading at a price-to-earnings ratio of 15.0, which is marginally higher than its 10-year average earnings multiple of 14.8. If the stock trades at its average valuation level in five years from now, it will incur a mild 0.3% annualized drag against its returns. Therefore, given also its 3.4% dividend, the stock is likely to offer a 19.6% average annual return over the next five years.

In contrast to the earnings of oil producers, the earnings of Halliburton and Schlumberger are not directly derived from oil production. However, Halliburton and Schlumberger are extremely sensitive to the underlying oil prices, as their earnings are determined by the level of drilling activity, which is closely tied to the price of oil. Overall, Halliburton and Schlumberger are highly leveraged to the price of oil.

Final Thoughts

Oil prices jumped following an attack on Saudi Arabia, one of the world’s largest oil-producing nations. A supply disruption or heightened geopolitical tensions could keep the oil price rally going. If oil prices continue to rise, these 10 stocks stand to benefit the most, while also paying attractive dividends to shareholders.

With reasonable valuations and growth potential in addition to their strong dividend yields, these 10 oil stocks have high expected total returns over the next five years. As a result, these 10 oil stocks are attractive for value and income investors expecting the recent oil price rally to continue.

1 2 3 4
View single page >> |

Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.