17 Oil Stocks, Including Warren Buffett’s Favorite Occidental Petroleum, Expected to Record Highest Free Cash Flow

The price action has been nothing short of breathtaking – oil has been swinging $55 a barrel this year. On Thursday alone, it jumped more than 7% after peace talks in Ukraine stalled and billionaire Warren Buffett increased his stake in a high-flying US oil company.

Early March 17, West Texas crude for April delivery CL.1,
+0.40%
rose 7.2% to $101.90 a barrel. That was down 22% from WTI’s intraday peak price of $130.50 on March 7, according to CL00 month one continuous contract data,
+0.40%
compiled by FactSet. But it’s up 35% from $75.21 at the end of 2021.

Rather than get excited about today’s action, consider this ballpark price of $75 for a barrel of oil. On Feb. 28, Sam Peters, portfolio manager at ClearBridge Investments in New York, said if oil prices stabilize in the $75-$80 per barrel range, “you’ll get very high free cash flow in the most of the United States. power generation companies. You can read more of his comments here.

A screen of oil producers with the highest expected free cash flow yields is below. It can serve as a starting point for your own research. The list includes Occidental Petroleum Corp. OXY,
+9.47%,
including BRK.B from Berkshire Hathaway Inc.,
+2.64%
Buffett recently shed light. Occidental shares are up 85% this year.

Read: Berkshire Hathaway stock hits record high. Buffett can thank Occidental, not Apple.

The imbalance between supply and demand bodes well for oil stocks

Peters was not necessarily focusing on the turmoil in global energy markets caused by Russia’s invasion of Ukraine. He envisioned the drastic reduction of capital investment by oil producers at a time of rising demand.

This graph shows the energy industry’s estimated capital expenditures for oil exploration, source development, and production relative to US inventory levels from 2004 to 2021:

On the left, the graph shows that capital expenditures increased when supply was low. The right side of the chart shows the incredible drop in capital expenditures when inventories began to decline.

This is your perfect scenario for a healthy supply/demand environment for oil producers and their shareholders over the next few years, even when peace breaks out in Europe.

Oil strainer — two magic words

The magic words are “cash flow”. Specifically, a company’s free cash flow is its remaining cash flow after capital expenditures. If we take the estimated free cash flow per share and divide it by the stock price, we get an estimated free cash flow yield. The higher, the better.

In his comments on free cash flow, Peters pointed out that the boards of directors – and influential shareholders – of oil companies have been reluctant to invest in the exploration and development of new wells of various types, because they had been so badly burned during supply-price declines that began in 2014 and amid the demand fallout at the onset of the coronavirus pandemic in early 2020.

Combine these factors with the Biden administration’s general hostility to domestic oil production, and one can expect U.S. producers to remain hesitant to invest.

And all of that means higher free cash flow that can be spent on regular dividends, special dividends, and stock buybacks, which can benefit investors and drive stock prices higher.

To screen for oil-related stocks, we started with the holdings of two ETFs:

  • The iShares Global Energy ETF IXC,
    +2.91%,
    including all 21 stocks in the S&P 500 energy sector, which is itself tracked by the Energy Select Sector SPDR ETF XLE,
    +3.44%.

  • The iShares S&P/TSX Capped Energy Index ETF XEG,
    +3.72%,
    which owns 20 shares of Canadian energy producers and is dominated by Canadian Natural Resources Ltd. CNQ,
    +4.78%

    CNQ,
    +5.26%,
    which represents 27% of the portfolio, and Suncor Energy Inc, SU,
    +3.58%

    SU,
    +4.18%,
    which has a weighting of 24%. A period of stable oil prices means a better chance of continued profitability for Canadian oil sands producers.

When combined, with duplicates removed, the two ETFs hold 65 stocks and consensus estimates of free cash flow, among analysts polled by FactSet, are available for 64 of the companies.

Here are the 17 for which estimated free cash flow returns for 2022 exceed 20%, based on closing stock prices on March 16. Stock prices and FCF estimates are in local currencies where the stock is listed:

Company Teleprinter The country FCF estimated return for 2022 Dividend yield

APA Corp.

APA,
+7.00%

we

31.85%

1.36%

Vermilion Energy Inc.

VET-CA

Canada

29.97%

0.95%

Crescent Point Energy Corp.

PMC,
+4.00%

Canada

29.67%

2.12%

Peyto Exploration & Development Corp.

PEY,
+3.32%

Canada

29.06%

5.70%

MEG Energy Corp.

MEG,
+5.63%

Canada

27.37%

0.00%

Birchcliff Energy Ltd.

BIR,
+5.77%

Canada

27.31%

0.61%

Petroleo Brasileiro SA ADR Pfd.

PBR.A-US

Brazil

26.47%

16.25%

Baytex Energy Corp.

earloop,
+2.40%

Canada

25.88%

0.00%

Petroleo Brasileiro SA ADR

ACB,
-1.81%

Brazil

24.17%

14.84%

Tamarack Valley Energy Ltd.

TVE,
+5.01%

Canada

23.71%

2.00%

Enerplus Corp.

IRON,
+3.35%

Canada

22.44%

1.04%

Equinor ASA

EQNR,
+3.62%

Norway

21.47%

2.20%

ARC Resources Ltd.

ARX,
+3.69%

Canada

21.27%

2.74%

Conoco Phillips

COP,
+4.23%

we

21.22%

1.94%

OMV AG

OMV,
-1.70%

Austria

20.89%

5.45%

Imperial Oil Ltd.

IMO,
+1.67%

Canada

20.81%

2.55%

Occidental Petroleum Corp.

OXY,
+9.47%

we

20.55%

0.98%

Source: FactSet

While not all of the companies on the list can be said to be playing on regular dividends, we have included dividend yields to show the “room” companies have to deploy free cash flow through dividends. higher regular dividends, special dividends or share buybacks.

A single data point should not be used as the basis for an investment decision. You should do your own thorough research when making investment decisions.

Don’t miss: 10 Most Yielding Dividend Aristocrat Stocks for Uncertain Times as Interest Rates Rise and Economic Growth Slows

About Robert Wright

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