Globally, GDP growth deceleration has been a concern this year. However, it’s worth noting that crude oil has trended higher by 16% even amidst macroeconomic challenges. I expect the positive momentum to sustain, and I believe it’s a good time to look at oil & gas stocks to buy now.
One reason to be positive about crude is high geopolitical tensions. In the coming years, there will be a geopolitical premium attached to crude oil prices. The second reason to be bullish is the possibility of rate cuts. Expansionary monetary policies are positive for risky asset classes like equities, commodities, and energy.
Additionally, rate cuts are likely to support growth, and I expect the demand for oil to gradually increase. Considering these factors, oil and gas companies are likely to benefit in the form of higher realized prices. Further, onshore, and offshore drilling companies can see a robust order intake.
Let’s, therefore, discuss three oil & gas stocks to buy now for stellar returns.
Chevron Corporation (CVX)
Chevron Corporation (NYSE:CVX) is a high-quality oil & gas stock to buy for sustained value creation. The stock has remained subdued in the last few quarters on the back of macroeconomic headwinds. However, the company has quality assets and an investment grade balance sheet. Once oil trends higher, I expect the 4.13% dividend yield stock to surge.
Talking about the cash flow potential, Chevron reported operating cash flow of $35.6 billion last year. If oil trades near $100 per barrel, the OCF is likely to be more than $40 billion.
This provides Chevron with ample flexibility for dividends, share repurchase, and aggressive capital investments. It’s also worth noting that the impending merger with Hess Corporation will add to the production and cash flow upside potential.
Another point to note is that Chevron is aggressively investing in the alternative energy business. By the end of the decade, the company expects renewable fuel capacity of 100mbd. Further, hydrogen capacity is expected at 150mtpa.
Aker BP ASA (AKRBF)
Aker BP ASA (OTCMKTS:AKRBF) is a hidden gem from the oil & gas industry that trades at an attractive valuation. Besides the potential for significant upside, AKRBF stock also offers a healthy dividend yield of 9.3%.
From a fundamental perspective, there are multiple reasons to be bullish on Aker BP. First, the company has a strong asset base with 2P and 2C reserves of 1,716 bnboe and 809 bnboe respectively. This provides visibility for steady production growth in the coming years.
Further, the company’s assets have a breakeven in the range of $35 to $40 per barrel. With the possibility of oil trending higher, it’s likely that free cash flows will be robust.
I must add that Aker BP has an investment grade balance sheet. As of Q1 2024, the company reported a leverage of 0.2. A liquidity buffer of $6.8 billion adds to the financial flexibility for aggressive capital investments.
Borr Drilling (BORR)
Borr Drilling (NYSE:BORR) is a provider of offshore shallow-water drilling to oil & gas companies globally. With potentially higher oil price, it’s likely that offshore drilling activity will accelerate and Borr is positioned to benefit.
It’s worth noting that BORR stock has remained largely sideways in the last 12 months. At a forward P/E of 12.5, the stock looks undervalued. Further, the offshore drilling company recently increased quarterly dividend by 100% to 10 cents. This implies a healthy dividend yield of 5.7%.
Specific to the business, there are two positives to note. First, Borr reported an order intake of $318 million during Q1 2024. It’s likely that the order intake will remain robust and provide growth visibility.
Furthermore, Borr has 93% contract coverage for 2024 and 71% for 2025. This provides clear revenue visibility. I must add that the contract coverage for 2025 is at a higher day rate and would imply EBITDA margin expansion.
Even for the current year, Borr Drilling has guided for EBITDA of $525 million as compared to $351 million in 2023. The growth and cash flow outlook, therefore, seems robust.
On the date of publication, Faisal Humayun 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.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.