During 2022, when equity market saw the bloodbath, rally in the oil stocks was considered as the success story. This was seen because, even though inflation impacted the consumer spending and business sentiment, crude oil price saw favourable impacts. Apart from this, geopolitical events, mainly the war between the Russia and Ukraine, further helped the strong performance of overall oil stocks. Collectively, there were strong gains even when S&P 500 saw a loss of ~20% for the year. However, the narrative was entirely different in 2023. This was because crude oil prices saw strong decline, as these prices halved from their 2022 peak of ~$120 per barrel. However, investors continue to hunt for best undervalued oil stocks for the healthy gains.
After unexpected attack on Israel in early October, there was an increase in geopolitical tensions in Middle East. Just to let our readers know, Middle East has been tagged as a region which is responsible for more than a third of world’s oil trade. This sort of development impacted the financial markets and the stocks on edge. When the markets opened, traders factored in the risk premium of $3-4 per barrel. Even though the prices have seen some stabilization since the attack, as Brent futures traded at ~$78.2 per barrel, this crisis keeps the financial markets in anticipation. Although direct impact has not been seen on physical oil supply, the observers continues to closely monitor situation. Global investment management firms expect that if this fight remains localized, oil prices are expected to remain conservative. But, if it escalates and other countries get involved, the prices can touch ~$120 per barrel or may even increase to $150. When 2023 kicked off, there were tensions among oil and gas experts about the market slowdown as a result of recession fears and fall in China’s economic activity. That time also, there were some best undervalued oil stocks on which traders decided to bet as these stocks were relatively resilient.
In long term, International Energy Agency (IEA) sees ~25% fall in demand of fossil fuel by 2030 and ~80% fall by the year 2050.
With this in mind, let us now have a look at best undervalued oil stocks to be considered by investors.
1. BP p.l.c.
The company is an integrated oil and gas company which explores for, produces, and refines the oil globally.
It announced completion of major technology upgrade at Fowler Ridge 1 wind farm in northwest Indiana which should enable site to produce increased power, more efficiently and with strong reliability. New Vestas turbines should be able to produce up to ~40% more energy. These are expected to generate average of ~314,000 kilowatt-hours each year. This amount should be enough renewable electricity to power ~27,000 homes. Project consisted upgrading ~40 turbines, which includes installation of ~120 individual blades and ~40 new nacelles, housing power generation equipment and transformers.
The company expects to recycle decommissioned blades, keeping upto ~3.3 million pounds of material from ending up in landfills. Recently, the company finally agreed to acquire remaining ~50.03% stake in solar power developer Lightsource BP.
Analysts at Citigroup initiated a coverage on the company’s shares and the bank gave a “Buy” rating in the report dated October 6th. Atlas Brown Inc. raised position in the company by ~0.6% during 3Q. It now owns ~44,396 shares of the company worth $1,719,000 after it bought additional ~286 shares in the last quarter.
2. Halliburton Company
It has been categorised as world’s 2nd largest oilfield-services company. It has evolved into premier wellbore engineering company, which has leading business lines in the fields of cementing, completion equipment, and pressure pumping.
In 3Q23, the company saw net income of $716 million, or $0.79 per diluted share as compared to net income of $610 million, or $0.68 per diluted share for 2Q23. Its total revenue for 3Q came in at $5.8 billion, and has remained flat as compared to 2Q23. Operating income was $1.0 billion in 3Q23, a 3% rise as compared to 2Q23. The company highlighted stability of its North America business and profitability of its International growth. It provided strong returns to its shareholders, demonstrated by over $500 million of FCF and repurchases of ~$200 million of common stock and ~$150 million of debt during 3Q.
During 3Q, it repurchased ~$150 million of debt throughout multiple senior notes, notes due, and global debentures, through the use of cash on hand.
3. Chesapeake Energy Corporation
The company is the US-based exploration and production company.
It has released its 3Q23 financial and operating results, with net cash provided by operating activities coming at $506 million. Net income of the company came in at $70 million, or $0.49 per diluted share and adjusted net income was $155 million, or $1.09 per share.
The company returned over $200 million to its shareholders through base dividend along with share buybacks and it announced total quarterly dividend of $0.575 per common share.
Cash on hand of the company came in at ~$713 million as at September 30, 2023, with 3Q net production coming at ~3,495 mmcfe per day (97% natural gas and 3% total liquids). The company presently operates 9 rigs and 3 completion crews, which includes 4 rigs and 2 crews in Marcellus and 5 rigs and 1 crew in Haynesville.
It has plans to drill 35 – 45 wells and place 50 – 60 wells on production in 4Q23. In 3Q, its credit rating outlook was moved to positive watch by the leading rating company, S&P Global Ratings.
Conclusion
While above are some of the best undervalued oil stocks to be considered by investors, there are several other names which are expected to perform in the current market environment. These include Chevron Corporation, Exxon Mobil Corporation, Valero Energy Corporation, etc. As per Institute of Energy Economics and Financial Analysis, fall of the oil and gas sector was gradual. It represented ~29% of S&P 500 in the year 1980 and now it has declined to ~5.3%.
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