The pandemic-driven slump in energy demand translated to an extended period of underperformance by oil stocks. Now it seems the worst is over, with the global economy showing sustained recovery. That view is underscored by the fact that the global composite PMI for June 2021 was 56.6. Based on this indicator, economic activity seems to be better than pre-pandemic levels.
Considering the positive outlook for the global economy and for oil, let’s talk about seven oil stocks that seem to be positioned to benefit from positive tailwinds.
Marathon Oil (NYSE:MRO)
Lundin Energy (OTCMKTS:LNDNF)
Helmerich & Payne (NYSE:HP)
Borr Drilling (NYSE:BORR)
Increased economic activity makes it unsurprising that OPEC and allies recently agreed to boost oil output, though the increase in output through 2020 is likely to be gradual. The OPEC decision was met by an immediate correction in Brent spot prices. However, oil prices have since firmed up, as increased supply coincides with increased global demand.
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7 Oil Stocks to Buy Now That the OPEC+ Deal Is Done: Marathon Oil (MRO)
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MRO stock is another name among oil stocks that’s worth considering for investors bullish on the energy sector. For the current year, MRO stock has already surged by 77%. However, fresh exposure can be considered on correction as the stock is likely to remain in an uptrend.
The first reason to like Marathon is the fact that the company’s assets have an attractive break-even. The company’s corporate free cash flow break-even is at $35 per barrel WTI. Currently, WTI oil trades at $71.9 per barrel. Therefore, there is clear visibility of robust free cash flows in the coming quarters.
For Q1 2021, the company reported FCF of $443 million. Even on a conservative basis, Marathon Oil is positioned for FCF in the range of $1.6 to $1.8 billion. This will help in aggressive investments, dividends and deleveraging.
It’s also worth noting that the company reported a total liquidity buffer of $4.1 billion for Q1 2021. Marathon already has an investment grade credit rating from three primary rating agencies. Therefore, financing investments is unlikely to be a concern.
MRO stock offers an annual dividend of 16 cents. However, if oil sustains prices above $70 WTI, it’s likely that dividends will increase. This is another stock re-rating factor.
Lundin Energy (LNDNF)
LNDNF stock is among those oil stocks that appear to be flying under the radar. I believe that the stock can be a long-term value creator.
A big reason to be bullish on Lundin Energy is the company’s 20% stake in the Johan Sverdrup field. The asset has gross reserves in the range of 2.2 billion to 3.2 billion barrels of oil equivalent.
Production in phase one is at 535mbopd. Phase two will first deliver oil in Q4 2022 with the field likely to have peak production of 720mbopd. Importantly, the full field has a break-even point around $20 per barrel. Therefore this asset will be a multi-year cash flow generator for Lundin Energy.
Of course, Johan isn’t the only asset on hand. The company has multiple assets in the Norwegian Continental Shelf that will ensure production remains stable around 200mboepd. With a net-debt-to-EBITDAX ratio of 1.3, the company can continue to aggressively invest in the exploration pipeline.
Further, Lundin Energy reported FCF of $526 million for Q1 2021. With an annualized FCF of $2.0 billion, the company has flexibility to invest in growth projects. At the same time, the company has a dividend yield of 4.58% and dividends are likely to sustain.
As oil prices trend higher, offshore drilling rig operators also stand to benefit. RIG stock has been in an uptrend in the current year. It seems likely that the positive momentum will sustain.
Transocean has 39 floaters with 100% focus on ultra-deep water and harsh environment. As of May 2021, the company reported an order backlog of $7.4 billion. That backlog provides clear revenue and cash flow visibility. Importantly, the company’s backlog is largely with investment grade companies. This secures medium-term cash flows.
From a liquidity perspective, Transocean reported $1.2 billion in cash. The company also has $1.3 billion in undrawn facilities. With the liquidity buffer, the company is fully financed through 2022 for capital investments and debt repayment.
Another important point to note is that the company’s fleet will command a higher day-rate if oil remains firm. Therefore, EBITDA margin expansion seems likely in the next 12-24 months. As cash flows swell, the stock is likely to trend higher.
Transocean is also reportedly eyeing Seadrill’s assets. If this news holds true, the company’s asset base is likely to expand in the coming quarters.
Helmerich & Payne (HP)
HP stock is an attractive pick among onshore drilling service providers. Besides the potential for stock upside, HP stock also offers a dividend yield of 3.35%. If oil continues trending higher, the dividends are sustainable with the company having a strong balance sheet.
In terms of recovery, Helmerich & Payne closed Q1 2021 with 94 active rigs. The number of active rigs increased to 109 by the end of Q2 2021. Furthermore, as of April 2021 the company had 127 active rigs.
As oil prices increase, the company’s rigs have seen higher deployment. Currently, Helmerich & Payne has a total fleet of 281 rigs. If market conditions continue to improve, there is ample headroom for revenue and cash flow to grow from here.
Fundamental strength is another reason to like Helmerich & Payne. Even with the challenges, the company has a low debt-to-capitalization of 14%. Additionally, the company has a total liquidity buffer of $1.3 billion. With an investment-grade credit rating, the financial risk is low.
On the flipside, Helmerich & Payne reported operating level losses of $161 million for Q2 2021. However, the cash burn concern is offset by two factors.
First, the company has strong fundamentals. Second, improving industry outlook and higher rig deployment is likely to ensure that operating losses narrow in the coming quarters.
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With a dividend yield of 5.31%, CVX stock is among the top oil stocks to buy for income investors. Chevron stock has trended higher by 12% in the last 12-months. A break-out on the upside seems imminent as oil trends higher.
From an asset perspective, a low breakeven price is the first reason to like Chevron. Furthermore, between 2016 and 2020 the company had a reserve replacement ratio of 99%. Reserve replacement is likely to remain robust, as the company has a significant exploration pipeline.
For 2021, the company expects capital expenditure of $14 billion. Further, through the next three years, the company has guided for annual capital expenditure of $15 billion (mid-range). Investments will ensure that production remains stable.
In terms of financing capital investments, internal cash flows are likely to suffice. For Q1 2021, Chevron reported operating cash flow of $4.1 billion.
With annual cash flow outlook of $16.4 billion, the company seems fully financed for the next few years. Further, the company has a low net-debt ratio of 22.5%, leaving ample headroom to leverage for growth.
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Equinor is another company active in the Norwegian Continental Shelf with quality assets. For the current year, EQNR stock has trended higher by 22%. However, more upside seems likely for this 2.99% dividend yield stock.
A low break-even oil price is an important consideration and a key reason to be bullish on Equinor. To put things into perspective, the company expects $45 billion in free cash flow between 2021 and 2026.
This is based on an average oil price of $60 per barrel. Brent spot prices are already trading near $75 per barrel. If oil sustains at current levels, Equinor is well positioned to deliver FCF in excess of $50 billion over the next five years.
Equinor also plans to deploy its cash flows from oil and gas assets towards transitioning into renewable energy. Over the next five years, the company expects to incur a capital expenditure of $23 billion towards building non-renewable assets.
At the same time, stable production growth is likely from oil and gas assets. The company has guided for production growth at a CAGR of 2% for oil assets in NCS through 2026.
It’s also important to note that robust FCF would imply sustained dividends and value creation through share repurchase. Considering the low break-even oil price assets, dividends are likely to sustain even at $60 per barrel oil.
Borr Drilling (BORR)
I’d like to close out by discussing an oil sector penny stock that’s appealing at current levels. BORR stock could be a multibagger — if oil continues to trend higher.
Borr Drilling is an offshore drilling contractor with a modern rig fleet. BORR stock has been an underperformer, declining by 3.2% this year. One reason for the stock decline has been equity dilution. However, it seems that the worst is over in terms of downside for BORR stock.
Currently, Borr Drilling has 13 active rigs with another 10 available for contracts. Additionally, the company has 5 rigs under construction. If the idle rigs are contracted, it will significantly boost the company’s revenue and EBITDA.
It’s also worth noting that as oil price trends higher, the company has witnessed traction in contracting activity. For the current year, the company has been awarded with $458 million in new contracts. Importantly, the average day-rate for new contracts is over $85,000. As day-rate trends higher, the company is positioned for healthy cash flows in the coming quarters.
From a financial perspective, the company ended Q1 2021 with a cash position of $49 million. Recently, the company also announced an at-the-market offering of $40 million. Therefore, there is ample liquidity buffer for the next few quarters.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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