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In the recent market correction, Warren Buffet has been on a shopping spree. It’s these corrections that provide an entry opportunity into quality stocks for value investors. Warren Buffett has been particularly focused on oil and gas stocks.
Be it Chevron Corporation or Occidental Petroleum, the legendary investor has made some big purchases. Of course, Buffett buying these stocks is not the only reason to be bullish. In general, the oil & gas sector has positive long-term tailwinds.
With the rise in geopolitical tensions, the West is looking to reduce dependence on Russia for energy. One way is a gradual shift to renewable energy sources. Another strategy is to increase oil and gas investments in regions with low geopolitical tensions. Oil and gas companies stand to benefit from higher investments.
Also, oil is likely to see some correction due to fears of a global recession. However, a big correction is unlikely. The International Energy Agency has also stated that the supply scenario is likely to remain tight well into 2023. With oil price factoring in the geopolitical risk premium, it’s likely that prices will remain resilient. This would imply strong cash flows for oil and gas companies.
Best Oil And Gas Stocks To Buy Right Now
Top 4 Oil and Gas Stocks to Buy Right Now for the Long-Term
Let’s talk about four oil and gas stocks to buy for the long-term as the industry outlook remains positive.
Chevron Corporation (NYSE: CVX) is possibly among the top oil and gas stocks to buy for the long term. After touching recent highs of $182.4, CVX stock has corrected to current levels of $137. This seems like a good opportunity to accumulate the 4.0% dividend yield stocks.
One reason to like Chevron is its robust cash flows. With low break-even assets, the company is positioned to deliver operating cash flows of around $30 billion for 2022. This gives the company ample flexibility to pay dividends and also make big investments.
As a matter of fact, Chevron Corporation plans to invest $15 to $17 billion in oil and gas assets in the next few years. This will ensure steady production coupled with a robust reserve replacement.
At the same time, Chevron has been diversifying with investment in renewable assets. It’s also worth noting that Chevron Corporation has a strong balance sheet with a net-debt ratio of 10.8%. With an investment-grade balance sheet, the company is well positioned to make aggressive investments and possibly increase dividends.
Overall, CVX stock seems poised for a reversal rally after some consolidation. With strong fundamentals and a big reserve base, the cash flow visibility is strong.
In the recent past, Warren Buffett has been mopping-up Occidental Petroleum (NYSE: OXY) shares. Currently, Berkshire has a stake of nearly 20% in the stock.
In terms of stock price action, OXY stock seems to be in a consolidation mode after a rally of 62% in the last six months. Corrections will be a good opportunity to accumulate the stock.
Coming to the business, Occidental also has an attractive break-even for oil assets. To put things into perspective, the company has guided for continued common dividends even if WTI is trading at $40 per barrel.
With oil above $80 per barrel, there is clear visibility for dividends, investments, and deleveraging. Occidental has planned to reduce debt by $5 billion in the near term. The target seems realistic with the company reporting $3.3 billion in free cash flow for Q1 2022. As the credit stress declines, the stock is likely to trend higher.
It’s also worth mentioning here that Occidental reported proved reserves of 3.5 billion barrels of oil equivalent as of December 2021. With strong cash flows, proved undeveloped reserves will be converted to developed reserves. Therefore, there is clear visibility for steady production in the long term.
3. Marathon Oil
Another oil and gas exploration stock that deserves a place in the long-term portfolio is Marathon Oil (NYSE: MRO). In sync with some correction in oil, MRO stock has also corrected from 52-week highs of $33.2 to current levels of $20.8. Investors with a long-term horizon can consider exposure at current levels.
For Q1 2022, Marathon reported EBITDA and operating cash flow of $2.6 billion and $1.9 billion respectively. This implies an annualized operating cash flow potential of $7.6 billion. Given the strong cash flows, dividends and share repurchase are likely to sustain.
Another point to note is that Marathon reported $10.6 billion in cash and short-term investments as of Q1 2022. On a consolidated basis, Marathon also has a relatively attractive debt-to-capital ratio of 46%. This provides the company with robust financial flexibility for capital investments.
Marathon has also been focused on renewable energy. The company has commenced construction of the soybean processing plant. This is expected to provide Marathon with 600 million pounds of refined vegetable oil annually. The production will be utilized as a feedstock for renewable fuel.
Overall, MRO stock is positioned to benefit from the higher oil prices. Refining and marketing margins are likely to remain healthy. MRO stock is poised for a reversal rally after the recent correction.
4. Exxon Mobil
Exxon Mobil (NYSE: XOM) stock looks attractive from a valuation perspective. The 4.15% dividend yield stock currently trades at a forward price-to-earnings ratio of 7.1.
One reason to be bullish on Exxon in the near term is a strong upcoming quarter. The company expects a significant upside in refining profits, which will boost overall numbers and cash flows.
Further, in the next few years, the company’s oil exploration business is likely to deliver strong results. A key reason is the commencement of production from Guyana assets.
From a financial perspective, Exxon reported net-debt-to-capital of 17% as of Q1 2022. This provides the company with ample headroom for investments.
At the same time, Exxon returned $5.8 billion to shareholders in Q1 2022. Value creation is likely to sustain through dividends and share repurchase.
Overall, the outlook for upstream and downstream activities remains positive. XOM stock is worth adding to the portfolio at current valuations.
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