Traders looking for the top oil and gas stocks to buy have to be incredibly nimble. The recent news from the sector is almost laughably inconsistent.
On March 6, 2024, this headline caught my eye: “Oil prices spike on crude inventory update and Powell’s rate-cut outlook.” But less than 24 hours later, this headline followed: “Oil prices slip on view US rate cuts could be delayed.
But like any commodity, oil prices come down to supply and demand. Or, as the headlines illustrate, it’s the perception of where supply and demand is headed. As traders and investors in the oil and gas sector know, if you’re not in when the sentiment shifts, you’ll miss the biggest gains.
One of those shifts is likely to come when the Federal Reserve cuts interest rates. Since October 2023, crude oil prices have been heading on the perception that the Fed was done raising rates. That means the next move in interest rates would be lower.
That same dynamic is in place today. If you’re a long-term investor, when the rate cut happens isn’t necessarily as important as the reality that, at some point, it will happen.
That will be bullish for oil prices. And that’s why it’s important to take a position in oil and gas stocks now.
The good news is that to find the top oil and gas stocks to buy you don’t have to look very far. In fact, most of them are the names you would expect. That’s okay, you need conviction, not special knowledge to benefit from the rise in oil stocks as crude moves to new highs later this year.
Energy Select Sector SPDR Fund (XLE)
The Energy Select Sector SPDR Fund (NYSEARCA:XLE) is an obvious choice as one of the top oil and gas stocks to buy. You’ll find many of the companies on this list among its holdings which is what you would expect from a sector ETF. And over 95% of the fund’s holdings are U.S. companies.
The fund has returned about 37% in the last five years and pays a dividend with a 3.57% yield. As you’ll see, that compares favorably with many of the top big oil stocks, making it suitable for income-oriented investors.
And with an expense ratio of just 0.10% investors may wonder, what’s not to like? For that, I might point out the fund’s beta value of 1.36. That suggests that if the price of oil falls, the fund may fall more than several of the individual components.
That’s not an issue if you believe oil prices are going up. But if you believe that macroeconomic factors, such as OPEC+ lifting their production cuts, would lower the price of oil, the XLE won’t be as strong of an investment.
Exxon Mobil (XOM)
Oil stocks like Exxon Mobil (NYSE:XOM) have been a better trade than investment for growth investors since 2019. However, long-term, income-oriented investors have done well. Despite fluctuations on the top and bottom lines, Exxon Mobil has delivered a share price return of 35.8% in the last five years. And investors also get a dividend with a yield of 3.54%. Put that together and you can see why XOM stock is one of the top oil and gas stocks to buy.
One of the highlights of 2023 for Exxon Mobil was the 18% growth it recorded in its Guyana and Permian operation. This was a record in annual production.
Last year was also a year that saw the beginning of consolidation in the sector. In October, Exxon announced it was acquiring Pioneer Natural Resources (NYSE:PXD) in an all-stock deal for $59.5 billion. The deal is expected to be finalized in the first half of 2024.
Occidental Petroleum (OXY)
Warren Buffett surprised some investors with his significant investment in Occidental Petroleum (NYSE:OXY) in 2020. At that time, Buffett expressed his confidence in OXY’s CEO Vicki Hollub. He’s been backing up those words ever since and particularly so in 2023.
On three different occasions, Buffett’s hedge fund Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) made significant buys of OXY stock. In fact, the buys became so predictable that investors now see a Buffett buy zone in OXY stock. Berkshire now owns $14 billion of OXY stock which equates to a 27% interest in the company.
OXY has been a market laggard for over the last five years with a negative return of 2.65% in that time. However, OXY is well-positioned to spring higher as crude prices move higher. And the company took a signficant step to winning back investors by reinstating its dividend in 2023 and promptly increasing it by 20% in the first quarter of 2024.
Chevron (CVX)
Chevron (NYSE:CVX) is another Buffett favorite and with good reason. The company continues to prioritize shareholder equity through a series of share buybacks and a dividend that yields an eye-popping 4.36% and one that the company has increased for 37 consecutive years.
Like Exxon, Chevron is in the middle of a potential acquisition. The company reached an agreement to buy Hess (NYSE:HES) in an all-stock deal worth $53 billion.
A dispute has arisen over what company has the rights to an oil block in Guyana that is a centerpiece of the deal. But even before that, Federal Trade Commission (FTC) regulators have expressed skepticism about allowing the deal to go through.
Obviously it wouldn’t be optimal for the deal to fall through, but both companies are in solid financial positions that it doesn’t change the long-term reason to own either stock. With crude prices rising, analysts have assigned a consensus price target of $180 which suggests they believe that CVS stock is undervalued at around 11.4x forward earnings.
Schlumberger (SLB)
Schlumberger (NYSE:SLB) is an oilfield services company. It’s also the world’s largest offshore oil driling company. Both of those business units put Schlumberger in a position to capitalize on what is likely to be a super cycle in oil in 2025 and beyond.
One reason behind falling oil prices was an expectation that electric vehicle (EV) ownership would take off. In March 2024, however, the EV revolution is clearly on hold. The reasons for that are for another article, and probably another website. But what investors need to know is that regardless of who occupies the White House in 2025, oil drilling is going to increase.
In the fourth quarter of 2023, Schlumberger reported significant growth for its digital offerings as customers are migrating to SLB’s cloud, edge, and AI products.
And as oil drilling resumes, offshore drilling will increase because it is less carbon intensive than traditional onshore drilling. That plays into another strength of the company.
Diamondback Energy (FANG)
You can’t say that Diamondback Energy (NYSE:FANG) is undervalued. Nevertheless, despite being up 28% in the last 12 months and trading near the top of its 52-week range, Diamondback Energy remains one of the top oil and gas stocks to buy for the coming oil bull market.
It’s not completely clear sailing for FANG stock. Like Chevron, Diamondback is facing regulatory scrutiny over its proposed acquisition of Endeavour Energy Resources. The concern is Endeavour’s status as the Permian Basin’s largest privately held oil and gas producer.
Despite the noise, analysts continue to bid FANG stock higher. The consensus price target of $194.15 is only about 6.2% higher than its closing price on March 7, 2024. However, since March 1, at least two analysts have increased their price targets at levels above consensus. The largest of these came from Piper Sandler which reiterated its Overweight rating and assigned FANG stock a $227 price target, up from $222.
Devon Energy (DVN)
On the company’s fourth-quarter earnings call, Devon Energy’s (NYSE:DVN) CEO Rick Muncrief commented on why energy stocks make up just 4% of the S&P 500 weighting despite being responsible for approximately 10% of the index’s earnings.
Muncrief cited diplomatically “extreme valuation in tech,” but he also said that analysts are not appreciating how much demand will still exist for hydrocarbons over time.
For shareholders of DVN stock, that reevaluation can’t come soon enough. Shares of DVN stock are down over 15% in the last 12 months, making it a huge laggard to the sector. The sell-off hasn’t been completely undeserved. Devon has delivered lower revenue and earnings on a year-over-year basis for the last four quarters.
Nevertheless, at a forward P/E of 8.9x, the stock looks undervalued. Analysts agree. They have a $53.20 price target on DVN stock which would push the stock 15% higher than its closing price on March 6, 2024. Additionally, 22 out of 33 analysts give the stock a Strong Buy or Buy rating.
On the date of publication, Chris Markoch had a LONG position in CVX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.