Oil & Gas Stocks That Will Likely Outperform Despite Falling Crude Prices

Crude prices have recently fallen, with Brent hovering around $100 and WTI falling below $100. Many oil stocks still have value, since many oil-related companies continue to produce increasing levels of cash flow on higher price realization. Consider the following oil stocks for your portfolio if you’re looking for sustainable long-term oil-related plays. Risks remain to oil prices, with global economic headwinds, an increase in supply, and geopolitical risks that could lower prices.

Three Oil Stocks to Consider

Occidental Petroleum NYSE: OXY is an oil acquisition, exploration, and exploration company.  It operates in three segments including Oil & Gas, Chemical, and Midstream/Marketing. Occidental Petroleum is one of the best-run oil & gas companies. It has strong margins, with net profit margin coming in at 22%, and return on equity surging to 64% during the most recent quarter. Occidental continues to benefit from strong oil prices while averaging $75 dollars per BOE in realized price per barrel during the recent quarters. As some of the hedges roll over, the company continues to improve efficiency. Therefore, despite the fall in crude prices, the company should see an increase in cash flow in the coming quarters as realized price per barrel increases, which in turn will help improve cash flow. 

The stock currently trades at 9x price-to-earnings and has a forward 7.5x and a debt to equity that is relatively low at 1.7. Additionally, the company has a high level of cash on hand of $1.9 billion; although the amount is down y-o-y, it still remains at a comfortable level. Consider the stock if you're looking for a steady oil-related play

Coterra Energy NYSE: CTRA is an oil E&P company that engages in the development, exploration, and production of crude oil and natural gas. The company is well capitalized and is set to increase production as it looks to take advantage of higher crude prices. It is also set to benefit from higher natural gas prices, which continue to head higher due to geopolitical issues and weather events. Natural gas recently jumped by over 5%, and with Coterra’s exposure to natural gas production, it is likely to see significant gains in revenue. Coterra also has significant natural gas reserves, which it is likely to deploy to make up for supply shortages elsewhere in the world.

 When combined with a balance sheet that is strong with a relatively low debt to equity, the company is in a strong position to take advantage of the bullish environment. However, the return on investment remains lower than what investors might like. Regardless, the company trades at a relatively cheap valuation of 13x P/E and has a forward P/E of 7. The company’s dividend remains slightly low at 2% but is likely to increase, as cash flow increases.

Continental Resources NYSE: CLR is another explorer, producer, and manager of crude oil, natural gas, and related productions, mostly around the northern and southern regions of the United States. It currently has proven reserves of around 1.7 billion barrels of proven crude oil and should benefit from higher prices as oil hedges roll over.  

But, the upside may be limited with the Hamm family making an offer of taking the company private at $70 a share. The Hamm family owns a large part of the company and has done well to ensure operational quality remains high, which reflects in its high return on equity and a strong portfolio of resources, which should do well over many years.  Furthermore, the company is well capitalized and has a debt to equity of around 0.8 makes it a relatively safe stock. Most importantly, investors are unlikely to accept the offer for a takeover as the value of the stock lies closer to $80-90 per stock.

Continental resources produce a free cash flow of around $4-5 billion per year and has a dividend payout ratio of 5%, largely due to ownership in the hands of the Hamm family, who have not been keen to part with cash.

The stock currently trades at a relatively inexpensive valuation of 11x earnings and a forward P/E of around 6.

Oil stocks should continue to perform well, as prices aren’t likely to collapse despite macroeconomic headwinds.  And OPEC and other major oil producers are either reducing supplies or keeping supply steady to take advantage of higher prices. Therefore, despite the recent pullback in prices, there are still opportunities to enter the market.