Even with macroeconomic headwinds, crude oil has increased by 15% year-to-date. The key reason for the rally is the likelihood of potential rate cuts in the coming quarters. I believe oil will likely remain in an uptrend, and energy stocks will be back in the limelight. This column focuses on three oil and gas stocks under $10 positioned to surge from undervalued levels.
An important point to note is that rate cuts will translate into a weaker dollar. This results in a rally for risky asset classes like equities, commodities, and energy. Further, with the global shift towards expansionary policies, GDP growth will likely be supported. I expect the demand for oil to increase in the next 12 to 18 months.
I believe these factors are likely to translate into crude oil trading above $100 per barrel. Therefore, undervalued oil and gas stocks can skyrocket. Let’s discuss three energy stocks that are poised for a strong breakout.
Ring Energy (REI)
Ring Energy (NYSE:REI) stock has remained sideways in the last 12 months. If oil remains in an uptrend, I expect a big breakout rally, considering that business developments have been positive.
The first point is that the company has a proven reserves base of 129.8mmboe. This provides clear production and revenue visibility. It’s also worth noting that the PV10 of reserves is $1.65 billion, which indicates the company’s undervaluation (market valuation of $350 million).
Ring Energy also has an impressive track record of production growth. Between 2018 and 2023, production has increased at a CAGR of 26%. Acquisitions have supported growth and underscores the company’s execution capabilities.
Things seem positive, even from a financial perspective. For Q1 2024, Ring Energy reported an adjusted free cash flow of $15.6 million. On a year-on-year basis, FCF has increased by 48%. With upside in production coupled with the likelihood of a higher realized price, I expect FCF to swell further. This will increase the company’s financial flexibility for exploration and further acquisition of assets.
Borr Drilling (BORR)
Borr Drilling (NYSE:BORR) is an offshore shallow-water drilling services provider to the oil and gas industry. The BORR stock has stayed relatively calm, reflecting the sentiments in the industry. However, at a forward P/E of 11.2 times, the company looks attractive.
For Q1 2024, Borr Drilling added $318 million to its order backlog. With 93% contract coverage for 2024 and 71% for 2025, the company has clear revenue and cash flow visibility. Further, the order intake will likely be robust as oil trends increase.
Last year, Borr Drilling reported adjusted EBITDA of $351 million. The company has guided for an EBITDA of $525 million (mid-range) for 2024. Robust growth in EBITDA and cash flows is likely to sustain, which is a key reason to be bullish.
I must add here that Borr increased the dividend by 100% in Q1 2024. This underscores the company’s confidence in cash flow visibility. Therefore, it’s only a matter of time before BORR stock surges higher.
Transocean (RIG)
Transocean (NYSE:RIG) is another undervalued offshore drilling services provider. However, unlike Borr Drilling, the company is focused on harsh environments and ultradeep-water rigs. RIG stock has corrected sharply by almost 40% in the last 12 months, and I see this as a good buying opportunity.
The first point to note is that Transocean reported an order backlog of $8.9 billion as of April. The backlog is front-end loaded and provides clear revenue and cash flow visibility.
Further, Transocean is focused on deleveraging. In the next few years, credit metrics are likely to improve on a sustained basis. The offshore driller has guided for year-end liquidity of $1.4 billion.
With high financial flexibility, there is a case for fleet expansion to boost growth. The company already has a modern fleet with an average age of 12 years. Overall, Transocean is positioned for steady growth and deleveraging. As oil trends higher, the backlog is likely to swell further. RIG stock, therefore, seems undervalued after a deep correction.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.