Top Oil Stocks to Buy if Prices Soar

Earlier this month, OPEC announced a production cut of up to 2 million barrels per day in response to falling oil prices. The move, meant to counter fears of a recession that could send prices lower if output remains consistent, could continue to put upward pressure on the prices of goods and services worldwide.

 

The silver lining of this decision for investors, however, is that oil companies in non-OPEC nations will likely see their share prices rise as they work to compensate for OPEC’s lower production.

 

Here are three top oil stocks that should be on your radar if oil prices begin to soar again.

 

A noted favorite of legendary investor Warren Buffett, Occidental Petroleum (NYSE:OXY) is one of the companies that stand to benefit most from soaring oil prices. The company operates extensively in the Permian Basin oil fields, as well as other US onshore production sites.

 

Occidental is an attractive investment option for a wide variety of reasons. To begin with, the company has delivered a staggering 60.25 percent return on equity, demonstrating management’s ability to control costs and improve efficiency.

 

The company’s cash flow is also quite strong at $11.68 per share. In Q2, revenue grew by 78.6 percent from the previous year, reaching $10.74 billion. Earnings beat the consensus estimate of $2.93 per share, coming in at $3.16.

At the moment, analysts predict that Occidental will reach a median target price of $72.50 over the next 12 months. This would give it an upside of just 6.1 percent from its current price of $68.25. If oil prices rise significantly, however, Occidental could certainly deliver much higher returns.

 

Occidental also has a great deal of room to raise its dividend. While the stock only yields 0.76 percent, the payout ratio stands at an extremely low 5.13 percent. As such, the company will likely be able to steadily increase its dividend, even without a major spike in oil prices.

 

Finally, despite its many positives, Occidental still appears to be trading at a discounted price. The forward P/E ratio for Occidental is just 6.13. If oil prices begin to rise again, it seems very likely that revenue and earnings growth will continue to drive share prices higher.

 

Another potentially excellent buy in a rising oil price environment is Chevron (NYSE:CVX). With oil fields ranging from the Gulf of Mexico to Australia, Chevron is a major worldwide oil producer that can profit from OPEC’s output cuts.

 

Like Occidental, Chevron has massively increased its revenues and earnings over the past year. In Q2, revenue rose to $65 billion, up from $36 billion the year before. Earnings more than tripled from $1.60 per share in Q2 2021 to $5.95 in 2022. Free cash flow also exceeded $10 billion for the quarter.

 

Analysts expect Chevron to have considerably more upside than Occidental during the coming 12 months. The median price target for Chevron is $182, up 11.8 percent from the most recent price of $162.72. As with Occidental, though, higher oil prices would likely lead to larger returns.

Chevron is also quite attractive from a dividend perspective. The stock yields 3.49 percent, and management has increased the payout for 35 consecutive years. While nowhere near as low as Occidental’s, Chevron’s dividend payout ratio is under 40 percent, giving it a good deal of runway left to raise its distributions.

 

Chevron appears to be a strong value at its current price. With a P/E of just 8.88, the stock’s pricing does not seem to be factoring in substantial growth. The company also carries a very low debt load, with its debt-to-equity ratio coming in at just 0.15. As such, Chevron is largely insulated from the pressures of rising interest rates on variable-rate debt.

 

Over the next five years, analysts expect Chevron to average 13.82 percent annual growth. Paired with its high dividend yield, this makes it very likely that Chevron is undervalued at its current price.

 

A continued trend of high oil prices could support even more positive growth levels, allowing Chevron to produce outsized returns.

 

Oil giant Exxon (NYSE:XOM) is another in the line of companies that will likely benefit from further supply constriction in the crude oil market. As the largest oil producer in the world by market capitalization, Exxon can see the benefits of higher prices at a far larger scale than Chevron and Occidental.

 

In Q2, Exxon beat analysts’ expected earnings of $3.60 per share, delivering $4.21 per share. Revenue, however, did miss the consensus target, coming in at $115.7 billion instead of the expected $117.1 billion.

 

Exxon also increased production by 130,000 barrels per day, demonstrating its ability to respond to mismatches between supply and demand by raising output.

Thanks to scale and carefully managed efficiency, Exxon’s breakeven point is just $37 per barrel. With prices flying far above this point and likely to continue rising, Exxon should be able to keep boosting its earnings and cash flows. In 2021, free cash flow totaled $36.05 billion, up from -$2.61 billion the year before.

 

Currently trading at $100.64, Exxon has an analyst target price of $110 for the next 12 months. This would give the stock a 9.3 percent upside, putting it in between Occidental and Chevron in terms of projected returns.

 

Like Chevron, Exxon has been raising its dividend for nearly 40 years and maintains a dividend payout ratio under 40 percent. The stock currently yields 3.5 percent, and it is clear that management will likely be able to continue Exxon’s run of dividend increases.

 

Exxon also appears to be an excellent value. With a forward P/E of just 7.55 and a projected growth rate of nearly 25 percent over the next five years, there seems to be a considerable mismatch between the price and the potential value of the business.

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