- Oil prices are expected to rise in the second half of 2023 as demand will outstrip supply.
- Occidental Petroleum (OXY): Warren Buffett just can’t stop buying one of his favorite stocks.
- Chevron (CVX): Another Buffett favorite, the company’s rock-solid financials are well-positioned for $70 oil and will only look better if oil moves higher.
- ConocoPhillips (COP): Heavy institutional buying is likely to send COP stock higher.
As is often the case with equity markets, stocks that perform well one year lag the market the following year. That’s been the case with energy stocks, and in particular oil stocks, which are underperforming in many sectors in 2023.
There are a confluence of factors driving down oil prices. Higher interest rates are tamping down commodity prices and suppressing demand among lower-income consumers who are cutting back on discretionary travel. And some dynamics such as work from home are likely to remain the same for the rest of 2023 and for some time to come.
However, most economists believe that demand for oil will outstrip supply in the second half of 2023. To begin with, much of the spending from the Infrastructure Act and the Inflation Reduction Act is now in the economy. This will continue to fuel construction projects for things like roads and bridges.
Plus, inflation is still sticky in areas like travel and tourism. And whether by land, sea, or road, that means there will be ample demand for oil. Don’t forget that China is reopening in earnest.
And on the supply side, one of the major factors likely to drive up prices is the commitment of oil-producing countries, in particular Saudi Arabia, to continue cutting production in an effort to raise the price of oil. Add in the Canadian wildfires and other countries facing significant outages and investors can see a perfect storm brewing for higher oil prices.
Here are three oil stocks that are likely to benefit from rising oil prices and are priced to buy now.
As in Real Estate, Location Matters
Occidental Petroleum Corporation (NYSE:OXY) is down about 2.8% in the last 12 months. But that’s just fine with Warren Buffett. The legendary hedge fund manager has made two significant buys in OXY stock in 2023. This brings Berkshire Hathaway (NYSE:BRKa) Corporation’s NYSE: BRK.B stake in the company above 25%.
One selling point for OXY stock for Buffett and other institutional investors is the company’s exposure to the vaunted Permian Basin. Occidental owns half of this area which is setting the company up for years of inexpensive production.
While it’s encouraging to have Warren Buffett as your largest shareholder, individual investors have reasons to buy the stock. First, it trades at a forward price-to-earnings (P/E) ratio of just over 12x. And Occidental Petroleum analyst ratings give OXY stock a 19% upside on its price target with an expected 24% increase in year-over-year earnings.
A Strong Balance Sheet and Juicy Dividend
One attribute of a Buffett stock that Occidental lacks is an impressive dividend. That’s not the case for another of Warren Buffett’s favorite oil stocks, Chevron (NYSE:CVX). Although Berkshire has been reducing its stake in Chevron (probably to boost its stake in Occidental), there’s nothing to suggest that Buffett has soured on CVX stock.
And why would he. Chevron is a well-managed company that continues to generate strong free cash flow and is returning capital to its shareholders in the form of share buybacks and a strong dividend. The company is a dividend aristocrat that has increased its dividend for 37 consecutive years. The yield is currently at 3.89% and has an annual payout of $6.04 per share.
An appealing aspect of Chevron is that it is an integrated oil services company. This means that it has operations in the downstream, midstream, and upstream sectors of the oil sector. The company is not a significant player in the renewable energy sector, but with a strong cash balance, the company will have the resources to do so when it defines the right opportunity.
Institutions Love this Oil Stock, Should You?
The last of the oil stocks on this list is ConocoPhillips (NYSE:COP). Like Chevron, ConocoPhillips is an integrated oil company that has operations in all areas of the oil sector.
A compelling reason for investors to consider COP stock is the commitment of institutional investors. Currently, just shy of 81% of the company’s stock is owned by institutional investors. With 19 shareholders owning 50% of the company.
The takeaway for retail investors is that commitment from institutional investors is a bullish sign for most stocks. To keep it simple, institutions aren’t likely to hold onto stocks that they believe will underperform the market so with a significant amount of COP stock in the hands of institutions, there’s a good reason to believe the stock will move higher.
The company also looks fundamentally attractive with a forward P/E ratio of just over 10x earnings. Plus, the company’s earnings are expected to grow over 14% year-over-year.