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The Ever-shifting Dynamics of Oil & Gas Stocks

The Ever-shifting Dynamics of Oil & Gas Stocks

Investors wading into the tumultuous waters of oil and gas stocks must adapt like chameleons. The recent headlines from the sector are a rollercoaster ride that would make even the staunchest trader queasy. 

On March 6, 2024, one headline blared, “Oil prices spike on crude inventory update and Powell’s rate-cut outlook.” But within a mere heartbeat, a new headline emerged – “Oil prices slip on view US rate cuts could be delayed.” The seesaw of sentiment exemplified in these reports underscores the fickle nature of the market.    

Oil prices dance to the tunes of supply and demand, or more aptly put, to the perception of where these forces are cascading. Traders in the oil and gas domain are well aware that missing the pivotal sentiment shift can spell the difference between colossal gains and cringe-worthy losses. 

One such watershed moment looms on the horizon with the anticipated Federal Reserve interest rate cut. Since October 2023, crude oil prices have been hitching a ride on the expectation that the Fed’s rate-raising spree was over, hinting at a future downward trajectory. 

The same compass guides current waters. Timing the rate cut might not be paramount for long-term investors; what’s crucial is the awareness that an adjustment is imminent. This foreshadowed shift bodes well for oil prices and underscores the urgency of establishing a position in oil and gas stocks posthaste. 

The silver lining in this tempest? Identifying the cream of the crop oil and gas stocks necessitates no Herculean effort. In fact, most are standard behemoths of the industry. This familiarity breeds confidence, a more potent ally in reaping profits as oil prices vault to unprecedented altitudes later this year.   

The Robust Energy Select Sector SPDR Fund (XLE)

Rise in gasoline prices concept with double exposure of digital screen with financial chart graphs and oil pumps on a field. Oil prices and oil price predictions

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The Energy Select Sector SPDR Fund (NYSEARCA:XLE) stands as a stalwart choice among the top oil and gas stocks to acquire. Among its holdings lie many of the firms listed, a typical trait of a sector ETF. Furthermore, over 95% of the fund’s arsenal comprises U.S. corporations. 

With a commendable 37% return over the previous five years and a dividend sporting a 3.57% yield, the fund’s allure shines bright. This appeal is heightened when juxtaposed against several prominent big oil stocks, making it an attractive prospect for income-driven investors.  

Nevertheless, the fund’s beta value of 1.36 might raise an eyebrow. This metric suggests that should the oil price plummet, the fund may experience a sharper decline than several individual components. However, this concern dissipates if the belief in an impending oil price surge holds firm. But for skeptics prophesying a price dip due to macroeconomic influences, such as OPEC+ easing production constraints, the XLE might lose its sheen as an investment avenue.  

Enduring Exxon Mobil (XOM)

Exxon Retail Gas Location

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Powerhouses like Exxon Mobil (NYSE:XOM) have been a more lucrative trade than a long-term investment for growth enthusiasts since 2019. However, for income-oriented investors with a steadfast outlook, the journey has been rewarding. Despite undulations in financial performance metrics, Exxon Mobil has boasted a share price surge of 35.8% over the last five years. Furthermore, investors revel in a 3.54% yield from dividends. The amalgamation of these factors solidifies XOM stock’s standing as a premier oil and gas stock to procure. 

One of Exxon Mobil’s crowning achievements in 2023 was the staggering 18% growth it witnessed in its Guyana and Permian operations. This milestone marked a pinnacle in annual production for the company. 

The yesteryear also witnessed the ripples of consolidation in the sector. Around October, Exxon unveiled its grand plan to acquire Pioneer Natural Resources (NYSE:PXD) in an all-stock transaction valued at a staggering $59.5 billion, set to be finalized during the first half of 2024. 

The Resilient Occidental Petroleum (OXY)

Energy Giants: Flourishing Amidst Market Fluctuations

Energy Giants: Flourishing Amidst Market Fluctuations

When Warren Buffett sets his sights on a company, investors sit up and take notice. In 2020, Buffett surprised many with his substantial investment in Occidental Petroleum (OXY). Fast forward to 2023, and Berkshire Hathaway has continued to show its support by making significant buys of OXY stock – so much so, that investors now recognize a “Buffett buy zone.” Berkshire now holds a whopping $14 billion in OXY stock, translating to a massive 27% ownership in the company.

Occidental Petroleum has faced its share of challenges, being a market laggard over the past five years with a negative return of 2.65%. Nevertheless, the company seems poised to soar as crude prices climb. In a move to win back investor confidence, OXY reinstated its dividend in 2023 and promptly hiked it by 20% in the first quarter of 2024.

Chevron: Navigating Choppy Waters

Chevron (CVX) holds a special place in Buffett’s heart for all the right reasons. The company has consistently prioritized shareholder value through share buybacks and a whopping 4.36% dividend yield, increased for 37 consecutive years. Not to be outdone, Chevron has firmly positioned itself in the acquisition game, with a deal in the works to acquire Hess (HES) in an all-stock transaction valued at $53 billion.

Despite a snag over an oil block in Guyana, and regulatory skepticism regarding the deal’s approval, both Chevron and Hess remain financially sound. Analysts have a bullish outlook, with a consensus price target of $180, indicating that CVS stock is potentially undervalued at around 11.4x forward earnings.

Schlumberger: Gearing Up for Oil’s Super Cycle

As the world’s largest offshore oil drilling company, Schlumberger (SLB) stands ready to capitalize on the anticipated oil super cycle in 2025 and beyond. With the previous dip in oil prices linked to an expected surge in electric vehicle ownership now on hold, signs point to an upswing in oil drilling activities in the years ahead. Schlumberger’s fourth-quarter growth in digital offerings, highlighting cloud, edge, and AI products, underscores its readiness to meet the market’s evolving needs.

Offshore drilling, known for its lower carbon footprint compared to onshore drilling, aligns with Schlumberger’s strengths, positioning the company well for the increased drilling activities on the horizon.

Diamondback Energy: Resilience in a Volatile Market

Diamondback Energy and Devon Energy in the Oil Stock Spotlight

Diamondback Energy (FANG)

A diamond in the rough, Diamondback Energy (NYSE:FANG) shines brightly as one of the top oil and gas stocks amidst a tumultuous market landscape. Despite sailing up 28% in the past year and nearing the apex of its 52-week range, Diamondback Energy stands tall, beckoning investors with promises of a profitable oil bull market.

Yet, the route for FANG stock is not devoid of turbulence. Similar to Chevron’s regulatory dilemmas, Diamondback finds itself under scrutiny for its proposed acquisition of Endeavour Energy Resources, the grandest private oil and gas producer in the Permian Basin.

Despite the cacophony surrounding it, analysts remain unwavering in their support for FANG stock. With a consensus price target of $194.15, a mere 6.2% above its March 7, 2024, closing price, the stock continues to attract positive bids. Evidently, analysts have cast their vote of confidence, with Piper Sandler leading the charge, lifting its price target from $222 to a formidable $227, echoing an Overweight rating.

Devon Energy (DVN)

Amidst the turbulent sea of energy stocks, Devon Energy (NYSE:DVN) stands as a sturdy ship, navigating the precarious waters of market volatility. Rick Muncrief, the CEO of Devon Energy, highlighted the disparity in S&P 500 weighting, where energy stocks contribute 10% of earnings but only constitute a meager 4% of the index, citing the overvaluation in the tech sector.

Despite setbacks, with DVN stock witnessing a hefty 15% drop in the past year, trailing behind its industry peers, hope glimmers on the horizon. Trading at a forward P/E of 8.9x, Devon Energy appears undervalued, exhibiting potential growth on the horizon. Analysts concur, setting a price target of $53.20, potentially propelling the stock 15% higher than its March 6, 2024, closing price.

With 22 out of 33 analysts touting a Strong Buy or Buy rating, the tides may be turning for DVN stock, offering investors a glimmer of optimism in an otherwise gloomy market.