The Best Oil Stocks As Prices Rebound

Oil prices rallied to their highest levels two and a half years after OPEC+ recently agreed to extend its historic production cuts. On Friday, WTI was trading at $70.91 per barrel while Brent crude was changing hands at $72.69. levels they last touched in 2018. By Wednesday morning WTI was trading above $72 and Brent had climbed above $74. Beginning on May 1, OPEC cut production by 9.7 million barrels per day, with the cuts scheduled to start declining beginning July 1. OPEC+ now says July's production cut will be 9.6 million bpd after Mexico said it remains committed to the group's prior agreement. Consequently, oil inventories that had built up in the middle of last year due to oversupply amid weak demand due to the pandemic now appear to be on pace to fall below historical averages as early as next month. Meanwhile, U.S. supply remains subdued as companies have held back production to conserve cash. OPEC+ is optimistic that shale production won't disrupt the delicate balance it has worked to establish for at least two years.

Another important catalyst: A growing wave of climate activism with corporate boards putting pressure on Big Oil to adopt climate-friendlier policies.

After souring on the sector for years, Wall Street is increasingly turning positive on energy with a growing number of analysts expressing optimism that the worst could be in the rearview mirror.

Goldman Sachs says the markets are underestimating oil demand, and sees Brent at $80 this summer.

S&P Global Platts has forecast oil prices to stay above $70 a barrel from mid-2021, driven by a more broad-based pickup in economic activity amid widening vaccination rollouts.

Francisco Blanch, a global commodities and derivatives strategist at Bank of America, sees oil prices hitting $100: "We think in the next three years we could see $100 barrels again, and we stand by that. That would be a 2022, 2023 story. Part of it is the fact we have OPEC kind of holding all the cards, and the market is not particularly price responsive on the supply side and there is a lot of pent-up demand ... We also have a lot of inflation everywhere. Oil has been lagging the rise in prices across the economy," Blanch has said.

Goldman has suggested that oil and gas investors should consider a "barbell strategy" with some exposure to more volatile names as well as cycle winners.

Here are our top picks for large-cap, mid-cap, small-cap, volatile, and cyclical oil stocks for the perfect portfolio as oil prices continue to climb.

#1. Large-Cap: ConocoPhillips Last year, Houston, Texas-based shale producer ConocoPhillips (NYSE:COP) earned accolades after announcing some of the deepest production cuts at a time when many shale companies were reluctant to lower production and relinquish market share. The company lowered its North America output by nearly 500,000 bpd, marking one of the biggest cuts by an American producer. This year, ConocoPhillips has kept drilling activity subdued and also kept a tight lid on capital expenditures.

And those austerity measures are now paying off.

Conoco has become the first large U.S. independent oil producer to resume its share buyback program after suspending it during last year's oil crisis.

Conoco says it has resumed stock buybacks at an annualized rate of $1.5B, and also plans to sell off its Cenovus Energy (NYSE:CVE) stake in the current quarter and complete the sales by year-end 2022. Proceeds from the sale--valued at ~$2 billion--will be used to fund share buybacks.

COP stock is rallying again after Bank of America upgraded the shares to Buy from Neutral with a $67 price target, calling the company a "cash machine" with the potential for accelerated returns.

According to BofA analyst Doug Leggate, Conoco looks "poised to accelerate cash returns at an earlier and more significant pace than any 'pure-play' E&P or oil major." 

Leggate COP shares have pulled back to more attractive levels "but with a different macro outlook from when [Brent] oil peaked close to $70."

But best of all, the BofA analyst believes COP is highly exposed to longer-term oil recovery.

But BofA is not the only Wall Street punter that's gushing about COP.

In a note to clients, Raymond James says ConocoPhillips' stock price is undervaluing the flood of cash the oil and gas company is poised to generate.

That's quite remarkable considering COP shares are up 39.3% in the year-to-date.

The bullish notes appear well-deserved. With WTI price in the mid-60s, ConocoPhillips would have little trouble generating copious amounts of free cash flows given the company's cash flow breakeven level of under $30/bbl.

#2. Mid-Cap: Marathon Oil

Giant oil refiner Marathon Oil (-1.30%)(NYSE:MRO) is one of the most popular stocks on the stock-trading app Robinhood--and for good reason.

Oil field services companies and oil refiners have been hardest hit by the energy crisis, and Marathon Oil (NYS:MRO) and Valero Energy (NYSE:VAL) have not been spared despite oil prices appearing to have stabilized around $50. Indeed, Marathon Oil's management is confident enough about the company's outlook that it recently reinstated the dividendafter suspending it in June, albeit at a lower rate of 3 cents a share compared to 5 cents before the cancellation. That modest dividend is good for a forward yield of 3.03%.

According to the company's management, MRO becomes cash-flow positive at oil price around $35/barrel, meaning the current WTI level of $61.50 gives it a nice cushion.

Despite rallying 102% YTD, MRO is still trading considerably lower than 2018 levels.

Marathon oil looks like a good bet due to its relatively strong balance sheet, including an untapped credit facility of $3 billion.

#3. Small-Cap: Northern Oil and Gas

Northern Oil and Gas Inc. (NYSE:NOG) has a rather unique modus operandi in that it invests in oil-producing properties, acting as a financial partner to exploration and production names. The company has more than 6,000 gross producing wells, primarily in the Bakken.

NOG has soared 119.6% in the year-to-date, with the rally dating back to September after it announced that it had agreed to acquire its first non-operating interest in the Delaware Basin in a $12M deal. That piece of news would have hardly turned heads if the buyer was an Exxon or a Chevron. The fact that a financially distressed company with more than a billion dollars in long-term debt and a high debt-to-equity ratio made such a bold move still deep in the throes of the crisis means that NOG really believed that an oil price rebound remained firmly in the cards, in which case its latest purchase could end up being a massive bargain. Further, NOG has upped its production guidance.

Further, NOG's recent Marcellus Shale acquisition is expected to return an average 18% FCF yield on the investment, making the shares appear deeply undervalued despite the recent run.

Back in February, Northern Oil and Gas announced it acquired Reliance Marcellus LLC's non-operated interest in Appalachia natural gas assets.According to the company, the acquisition will generate ~$125 million of free cash flow over the next four years with an average 18% FCF yield on the investment.