Stocks to buy

3 Oil Stocks to Buy Before Rate Cuts Trigger a Big Rally

It was in June 2022 when crude oil traded above $120 per barrel. However, with contractionary monetary policies and subsequent macroeconomic headwinds, oil has been in a correction mode. Amidst the volatility, black gold has remained sideways in the last 12 months. I believe a breakout is imminent after this phase of consolidation. So, it might be a good time to consider some undervalued oil stocks.

It’s worth noting that multiple rate cuts might be in the cards over the next 12 months. With expansionary policies, global GDP growth will likely accelerate in 2025 and beyond. That is the single biggest catalyst for expecting oil to trend higher. Further, geopolitical tensions have escalated and will ensure oil prices command a premium.

I have looked at a blue-chip stock, a hidden gem and a penny stock from the oil and gas sector. These ideas look undervalued and poised for a strong rally in the next few quarters.

Occidental Petroleum (OXY)

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Occidental Petroleum (NYSE:OXY) is among the blue-chip oil and gas stocks to buy. OXY stock has remained sideways in the last 12 months, and a breakout on the upside seems likely. A potential upside in oil prices would be a perfect catalyst. I must add here that Occidental reported a 22% quarterly dividend growth in Q4 2023 to 22 cents per share. There is a case for further upside in dividends as oil trends higher.

My view on dividend growth is underscored by the point that Occidental has an investment-grade balance sheet. Last year, the company generated $5.5 billion in free cash flows.

Besides shareholder returns, Occidental has been active on the acquisition front. Last year, the company closed the acquisition of Carbon Engineering and announced the acquisition of CrownRock. The latter is likely to be immediately accretive to free cash flows.

Overall, with proven reserves of four billion barrels of oil equivalent, healthy cash flows and a strong balance sheet OXY is a core portfolio stock.

Aker BP ASA (AKRBF)

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Aker BP ASA (OTCMKTS:AKRBF) is a hidden gem among oil stocks. AKRBF stock looks undervalued and offers a dividend yield of 9.22%. I believe the stock can deliver multibagger returns, considering an investment horizon of five years.

As an overview, Aker BP is an oil exploration company with assets focused on the Norwegian Continental Shelf. As of 2023, the company reported 2P reserves of 1.72 billion barrels of oil equivalent. With a robust asset base, the company is positioned for steady production growth.

An important point to note is that Aker BP has a full-cycle portfolio break-even oil price of $35 to $40 per barrel. With oil near $80 per barrel, the company is positioned for healthy free cash flows. For 2023, Aker reported operating cash flow of $5.4 billion (after taxes).

As cash flows swell further, I expect higher dividends and increased capital investments. At the same time, Aker BP has a low leverage of 0.19 and there is ample financial flexibility for acquisition-driven growth. Historically, the company has pursued several mergers and acquisitions.

Ring Energy (REI)

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Let’s close the discussion with a penny oil stock that holds immense potential. Ring Energy (NYSE:REI) looks deeply undervalued at current levels of $1.70. If Brent trades in the range of $90 to $100 per barrel, REI stock can potentially surge above $5.

It’s worth noting that Ring Energy commands a market valuation of $330 million. In comparison, the PV10 (present value of estimated future oil and gas revenues, net of forecasted direct expenses) of proved reserves stands at $1.65 billion.

For 2023, Ring Energy reported adjusted cash flow from operations of $197 million. With production growth visibility coupled with potentially higher realized oil prices, I expect OCF of more than $250 million this year.

Therefore, there is ample financial flexibility to invest in growth and pursue deleveraging. Ring Energy has also pursued multiple acquisitions in the last five years. That’s another potential catalyst for reserves and production growth.

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.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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