Energy stocks are again in fashion with investors. During the month of March, the energy sector was the strongest performer among the 11 stock market sectors. Year-to-date, it is only behind communication services in terms of performance.
A lot is going on in the energy world, fueling higher prices. Middle East turmoil continues while concerns over tighter supplies ratchet up. OPEC production cuts are a major factor in higher prices. As I write this, the price of Brent crude is $90.42.
The potential for an Iranian strike in Israel is serving to push prices higher. Some sources believe a strike is imminent. Such a move would disrupt the supply chain threatening to raise prices higher again. In short, there continues to be reason to believe oil prices will rise higher still. In turn, investors should consider pivoting into energy stocks at the moment.
Diamondback Energy (FANG)
Diamondback Energy (NASDAQ:FANG) is a major, concentrated oil producer with significant assets in the Permian Basin of the United States. The U.S. oil industry is undergoing a period of consolidation that is also concentrating production domestically in some cases. Diamondback Energy is an excellent example of one such firm.
The company recently agreed to acquire privately held firm Endeavor Energy Partners. The $26 billion purchase strengthens Diamondback Energy’s already strong, concentrated position in the Permian Basin of Texas.
Following that acquisition, Diamondback Energy became the third largest producer in the Permian Basin behind ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX). Those other oil majors are not pure-play Permian producers, making Diamondback Energy a unique opportunity overall.
The company should return half of this year’s free cash flow as dividends and repurchases. That’s down from a target of 75% prior to the Endeavor Energy Partners acquisition. The positive news is production from that acquisition could more than make up for the potential losses.
Chevron (CVX)
Chevron is generally a go-to option for investors seeking broad exposure to the energy market. It is one of the oil majors and a well-regarded stock overall. It’s also a somewhat underappreciated share at the moment while also expressing strong potential.
The company’s strong potential is underpinned by the fact that it is a perennial choice of Warren Buffett. His firm generally invests in firms showing free cash flow and a strong commitment to investors through dividends and share buybacks.
CVX has all those attributes in its favor. That’s why I believe it continues to express strong potential. However, the company is a bit undervalued at the moment, likely because of its uncertain acquisition of Hess (NYSE:HES).
If the deal ultimately goes through, it should serve to strengthen all of those previously mentioned factors. In other words, it would become even more attractive to a Buffett-style investor.
ExxonMobil (XOM)
ExxonMobil is another major player in the energy industry. I think there’s good reason for investors to consider stocks representing major firms like ExxonMobil through the midterm.
The oil and gas market is expected to grow at a compound annual rate of 5% to 6% from 2024 through at least 2028. Investors exposed to diverse, large operations like those at XOM should be able to secure such returns.
The company is primarily committed to carbon-intensive investments — i.e., oil. However, it is also actively taking steps to reduce its carbon intensity overall. That arguably matters to investors and ExxonMobil’s efforts could increase demand.
XOM shares are also Dividend Aristocrats, having last been reduced in 1983. Income stocks don’t get much more reliable than Exxon Mobil. Overall, its shares are an excellent choice, providing exposure to secular growth and income opportunities. The American firm has a less green approach than its European counterparts, and that looks like a better choice for now.
Schlumberger (SLB)
It’s logical to buy shares of stock in oil services firm Schlumberger (NYSE:SLB) at the moment. Oil prices are as high as they’ve been over the last 6 months, suggesting drilling activity will continue to rise.
The relationship between oil prices and drilling activity is well correlated. For every 10% increase in price, there is a 4% increase in drilling activity. That same relationship holds as prices decrease. Schlumberger is well-positioned to benefit as oil prices surge again.
Schlumberger is also in acquisition mode, which is prevalent throughout the energy sector. The company is purchasing ChampionX (NASDAQ:CHX), an energy firm with lower cyclicality overall. Schlumberger will likely leverage that stability to increase dividends and buybacks that require greater stability overall. Therefore, SLB shares are becoming increasingly attractive to a more conservative energy investor. Conservative investments are a logical choice as the industry undergoes heavy consolidation. These larger firms will have significant asset bases and subsequent stability as the number of players shrinks.
Devon Energy (DVN)
Devon Energy (NYSE:DVN) is an excellent choice for investors as oil prices continue to rise. The firm’s stock includes a dividend that operates on a fixed plus variable schedule. That means the company pays a significant bump in dividends as operating metrics improve.
Devon Energy is also noted to have a breakeven price of approximately $40 per barrel of West Texas Intermediate oil (WTI). WTI prices are currently at $85 and change. With prices continuing to rise over the past few months, it is logical to assume that Devon Energy’s operating metrics are also improving.
Shares have undergone a U-shaped recovery in 2024, highly suggesting that the fixed plus variable dividend will also increase. The company increased its most recent dividend by 2 cents to $0.22. Although that is not a substantial increase, it should be noted that it doesn’t take into account more recent resurgences in oil prices. Devon Energy stock is a solid choice overall, given low operating costs and one that rewards investors during periods of outperformance.
Shell (SHEL)
Shell (NYSE:SHEL) shocked the investment world a few years ago when it decided to cut its dividend. The news was not well received by investors and its stock consequently suffered.
Shell has since undertaken strong efforts to regain the trust of investors through its dividend programs. I’d argue that the company is again reliable for income investors. Shell completed a share buyback program at the beginning of this year valued at $3.5 billion. That buyback program began in November of 2023.
More recently, Shell increased its quarterly dividend by 4%. The positive news comes after the company reported stronger-than-expected earnings. Shell continues to make efforts to convince investors that it is the company it once was again.
Oil prices are strong again, suggesting Shell can continue to reward investors moving forward.
Halliburton (HAL)
Investors should buy Halliburton (NYSE:HAL) stock for the same reason they should consider Schlumberger. Both firms provide oilfield services and products in particularly high demand as oil prices rise.
That said, Halliburton also proves it can do well even in tougher times. Case in point, in 2023, the company’s revenues increased by 13% despite a tough year overall for energy stocks. That is good news in and of itself, but particularly so given that the company should do much better in the current environment. Energy prices are rising and, as we have seen with such a phenomenon, are correlated with increased opportunities for oilfield service providers.
Exploration & Production (E&P) activity will remain strong as long as the current global turmoil continues. That is highly likely to be the case given the complexities of those situations and the overall number thereof. Halliburton is a solid choice in most operational environments and a particularly strong choice at the moment.
On the date of publication, Alex Sirois did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.