Energy stocks have come to life in the past year. Companies in the space have enjoyed strong cash flows thanks to oil prices spiking -- and there's reason to believe the trend can continue.
Oil supplies have tightened due to years of underinvestment, and the situation has been made more precarious with Russia's invasion of Ukraine. Russia also recently slashed oil production, and OPEC has no immediate plans to increase its supplies, so oil prices could remain higher for an extended period.
The undersupply is one reason why Goldman Sachs analysts see the price of crude oil rising to $94 per barrel at some point in the next year. In addition, the U.S. will have to refill its strategic petroleum reserve at some point, a process that could take years, according to U.S. Energy Secretary Jennifer Granholm. With that in mind, here are three bargain-basement energy stocks you can buy today and hold forever.
1. Chevron
Chevron's (NYSE: CVX) balanced business model make this oil and gas stock appealing long-term. It has upstream and downstream operations.
Upstream operations include exploring, producing, and transporting crude oil and natural gas. This business benefits from higher oil prices and earned $30.3 billion in 2022, a 91% increase from the prior year. Upstream operations can be an excellent source of income when prices are high, but it also results in uneven earnings that are dependent on market conditions.
If this were Chevron's only business, it would be hard-pressed to maintain and grow its dividend, which it has consistently done for 35 years. Luckily for investors, this isn't its only source of income. Chevron's downstream operations include refining crude oil into petroleum, transporting products through pipelines, and running gas stations worldwide. Last year, the downstream business earned $8.2 billion.
In 2022, Chevron acquired Renewable Energy Group for over $3 billion, making it the second-largest biorenewable fuels producer in the U.S. Investors can buy shares of Chevron at a discount to its historical valuation, with its price-to-tangible-book-value (P/TBV) ratio around 2.05, below its 35-year average of 2.09.
2. ExxonMobil
ExxonMobil (NYSE: XOM) runs a similar operation to Chevron, balancing upstream and downstream operations to produce steady income. The company also has a long history of increasing its dividend over the past 40 years.
Last year, ExxonMobil earned $55.7 billion and generated $62.1 billion in free cash flow. It has used this free cash flow to pay down its long-term debt. Since peaking at the end of 2020 at $66 billion, Exxon has paid back nearly 43% of its debt. It also rewarded shareholders with $30 billion between dividends and share repurchases last year.
In the future, ExxonMobil plans to spend $17 billion on lower-emissions investments, with 60% going toward cutting its emissions and another 40% going toward investments in other companies to pursue carbon capture and storage (CCS), biofuels, and hydrogen energy.
Oil giants see CCS as a key component to their long-term success. The process allows them to lower emissions from their business, reducing the need to switch to alternative fuels. These companies also anticipate a large future market for carbon credits and other financial incentives like tax credits for offsetting carbon with this technology.
It recently inked an agreement with CF Industries to capture and store 2 million metric tons of carbon annually. The deal is one of many to come in a CCS market that it expects to grow to $4 trillion by 2050. ExxonMobil is relatively cheap, with a P/TBV ratio of 2.44, below its 35-year average ratio of 2.58.
3. Occidental Petroleum
OccidentalPetroleum(NYSE: OXY) engages in oil and gas exploration and production, with 80% of its production in the U.S. in the Permian basin in Texas. Last year, its income was $13.3 billion, and its free cash flow was $13.7 billion. Flush with cash, Occidental rewarded shareholders handsomely, paying out $1.2 billion in dividends and repurchasing $3 billion in stock.
Occidental has also improved its balance sheet following its purchase of Anadarko in 2019, which required a lot of special financing from Berkshire Hathaway. It paid off $10.5 billion in debt during the year, or 37% of the total principal outstanding.
The company also laid out plans for its first direct air capture (DAC) facility in the Permian that will cost up to $1 billion. DAC technology extracts carbon dioxide directly from the atmosphere. It can then be stored underground or used for other purposes like food processing or producing synthetic fuels. It plans to have 135 direct air carbon capture plants operating by 2035.
Occidental also views CCS as a massive opportunity worth anywhere from $3 trillion to $5 trillion. It recently signed two commercial agreements supporting its DAC plant. SK Trading has agreed to buy up to 200,000 barrels of net-zero oil annually over five years, so that it can develop net-zero products like lower-carbon aviation fuel. It also agreed to sell 100,000 tons of carbon offset credits to Airbus annually over the next four years.
Occidental has grown its production out of the Permian basin this past year, which should boost its profit margin and position it to capitalize on potentially higher oil prices. Occidental trades at a P/TBV ratio of 2.67, above its 35-year average of 1.93. However, its price-to-earnings ratio of 4.8 and one-year forward P/E ratio of 10.3 have it at a cheaper valuation than Chevron and Exxon.
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Courtney Carlsen has positions in CF Industries and ExxonMobil. The Motley Fool has positions in and recommends Berkshire Hathaway and Goldman Sachs Group. The Motley Fool has a disclosure policy.
