The market is always forward-looking. That’s one explanation for the drop in energy stocks after a blowout year in 2022. There are some catalysts, however, that point to increased demand. That’s why now is the time to look for energy stocks with growth potential.
To begin with, OPEC appears to be ready to announce its second production cut in 2023. Simple supply and demand suggest that will be bullish for the price of crude oil. In fairness, OPEC cut production for the first time in April when oil was in the $70s. As of this writing, it’s in the $60s, so maybe the second time is the charm. Another catalyst for oil prices may come from the proposed Fiscal Responsibility Act (i.e. the debt ceiling bill). If approved, the bill will expedite the construction of the Mountain Valley Pipeline. It also omits proposals by progressive legislators to fast-track the construction of transmission lines that would accelerate the country’s transition away from fossil fuels.
And once again, the market is forward-looking. That means energy stocks likely already factor in a recession late this year. That means now is the time to start looking at the best energy stocks for a rally. Here are 7 options for you to consider.
Occidental Petroleum (OXY)
Warren Buffett is credited with the advice for investors to “buy when others are fearful.” No matter how you feel about Warren Buffett, you have to give him credit for practicing what he preaches. Buffett’s hedge fund, Berkshire Hathaway (NYSE:BRK-B) is a major shareholder of Occidental Petroleum (NYSE:OXY).
And so, when OXY stock was trading below $60 in March, Buffett pounced. And the company continued to buy the company’s shares in May. But what makes Occidental a favorite of Buffett? One reason is the company’s recent surge in free cash flow (FCF). The company is pledging to use some of the $1.7 billion in FCF it generated in the first quarter to buy back its shares. And the company also pays a juicy dividend that currently has a yield of 1.23%.
Occidental Petroleum also deserves consideration as one of the energy stocks with growth potential because its objectively undervalued. OXY stock trades for a forward price-to-earnings ratio of just over 11x. Analysts give the stock a consensus price target of $68.96 which is a gain of approximately 20% from the stock’s current price.
Another energy stock that is a favorite of Warren Buffett is Chevron (NYSE:CVX). It’s true that Buffett has sold some of his CVX stock position recently. And CVX stock tumbled as a result. The stock is down 15% in 2023 alone and down approximately 13% in the last 12 months.
But Buffett’s firm still has a significant position in the stock. That’s unlikely to change because Chevron has the same desirable characteristics as Occidental Petroleum. Specifically, the company has been buying back a significant amount of its own stock. And it pays a healthy dividend which has been increasing for 37 consecutive years.
The company’s breakeven oil price is around $50. So even with the price of crude around $68, the company’s balance sheet is in great shape. Plus, the stock is trading for just 10.5x forward earnings.
Skeptics will say it’s foolish to invest in traditional oil stocks at this time. However, those investors are missing the larger plot. Companies like Chevron are already investing in renewable energy projects. In fairness, Chevron is taking a more measured approach, but it has the cash on hand to make a splash when it decides where it can have the most impact. Plus, the company is a major player in the transport of liquefied natural gas, which will remain high in demand as long as Russia’s war with Ukraine is ongoing.
NextEra Energy (NEE)
NextEra Energy (NYSE:NEE) is the next stock on this list of energy stocks with growth potential. The company stands to be one of the largest beneficiaries from the proposed debt ceiling bill. The company contributed significantly to various Congressional leaders in March to attempt to get the Mountain Valley pipeline approved.
This should remind investors that NextEra Energy is a company that relies on fossil fuels and clean energy. All of the company’s clean energy projects are in the United States. This means the company will likely receive tax breaks based on the Inflation Reduction Act passed by Congress in 2022. In that regard, it’s a company that may well reflect the “all of the above” landscape that is likely to be the most productive path for this country’s energy needs.
NEE stock is down almost 15% in 2023 and it trades at about 21x earnings. The company’s core business is to provide electricity to a wide geographic area that includes Florida as its largest service area. That gives the company attributes of both a growth stock and a value stock.
Halliburton (NYSE:HAL) is a strong contender to be among the best energy stocks for a rally. To be fair, the oil services company will need to see more drilling in the oil patch. And HAL stock will be heavily affected by crude prices that remain under $70. The reopening of China is not the catalyst that many were expecting. But the need to refill the Strategic Petroleum Reserve, the likelihood of a pause in interest rate hikes, as well as OPEC making an additional production cut will be bullish for oil prices. In turn, HAL stock is likely to benefit.
HAL stock is down 23% in 2023, but at 13x earnings and 9x forward earnings, HAL stock is undervalued. Analysts seem to agree and give the stock a $48 price target. If that’s correct, it would push shares to a seven-year high.
Devon Energy (DVN)
Devon Energy (NYSE:DVN) is one of the most attractive stocks on this list of energy stocks with growth potential. The stock is trading near its 52-week low and it has a current P/E ratio of 5x earnings. The independent oil and gas company delivered its first quarter earnings report in early May. It met expectations on the top line and beat the bottom line. But the key number was its oil production which came in at an all-time high of 320,000 barrels per day.
If as expected oil prices rise, Devon Energy will benefit from higher margins and increased profitability. The company is aggressively buying back its shares and increasing its dividend. These are both signs that management believes DVN stock is undervalued. And apparently so do analysts. The stock has a consensus price target of $63.96 which is a gain of approximately 45% from the stock’s price as of the market close on June 1, 2023.
Valero Energy (VLO)
Valero Energy (NYSE:VLO) is the largest independent refiner in North America. Since refining oil is needed for the gas we put in our cars, Valero would be a logical pick as one of the top-performing energy stocks. And with VLO stock trading near its 52-week low and at around 3x earnings, it’s one to watch. In addition to refining crude oil into gasoline or diesel fuel, Valero is one of the leading refiners of Ethanol. To date, this represents a small fraction of the company’s overall revenue.
And speaking of revenue, the company had a record revenue year in 2022. And that revenue came with record annual earnings per share of $29.26. In the first quarter of 2023, the company posted earnings per share of $8.27. That was nearly four times the EPS the company delivered in the first quarter of 2022. That’s particularly impressive considering the first quarter is typically the company’s weakest in terms of revenue and EPS.
Schlumberger (NYSE:SLB) is best known to long-time investors as an oil services company that provides the equipment that companies need to drill. The stock’s poor performance over the past five years illustrates how sensitive the company is to oil prices.
Recently, Schlumberger rebranded itself as part of an attempt to make a pivot into carbon capture. The company seems late to the party on this transition. However, it could get a lift from rising oil prices. Manufacturers are spending a significant amount of money to electrify all forms of transportation. That investment alone makes it logical that oil prices will have a ceiling.
That being said, the global recession may be fully priced into oil. What is likely not priced in is the production issues – and elevated price tags – that are putting a ceiling on EV demand. SLB stock is not one to hold for the long term. But if you’re looking for energy stocks with growth potential in 2023 and 2024, it’s a name to watch.
On the date of publication, Chris Markoch had a LONG position in CVX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.