5 Best Oil Stocks to Invest in For June 2021

Summer season is starting in the United States and that means good news for oil prices. Meanwhile, a positive backdrop resulting from optimistic demand forecasts, prolonged negotiations between the US and Iran about a nuclear deal, and OPEC’s decision to continue ramping up its supply levels as previously agreed may provide the perfect setup to see oil stocks moving higher during the third quarter of 2021.

In this context, the following is a selection of the 5 best oil stocks you should be taking a look at if you believe this commodity will continue to move higher as the world economy bounces back from the virus crisis.

What Influences the Price of Oil Stocks?

The price of oil stocks can be influenced by multiple variables including the following:

• The price of crude (Brent and WTI futures).
• Climate and natural events that disrupt supply or demand.
• Production levels.
• Company-specific issues.
• Overall market conditions.

These variables change over time and investors must keep an eye on them to determine if there is an opportunity to invest in oil stocks at the moment or if the market is getting ahead of itself when valuing these companies.

Meanwhile, not all oil stocks are necessarily companies that extract crude as there are other related businesses such as oil services firms that could also offer exposure to the sector. The price of the stock of these companies tends to be influenced by the same variables as pure-play oil drillers, which is why I will include one of them in this selection.

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5 Best Oil Stocks to Invest in 2021

Diamondback Energy Inc (FANG) – Top Pick

Diamondback Energy (FANG) is a Texas-based oil & gas exploration and drilling company that has operations in the US Permian Basin primarily. The firm has been able to produce over 60 million barrels of crude in the past couple of years along with combined volumes exceeding 100 million barrels of oil equivalents per year.

Last year, same as other companies within the sector, the firm took a huge write-down of $6 billion resulting from the depreciation of its oil fields in the context of what was perceived as a long-lasting downturn for the price of crude.

If we deduct that item from the firm’s financials, its operating profits would have moved from negative $5.5 billion to positive $500 million for an operating margin of 19%. In the past couple of years, operating margins have also been quite good while the firm’s balance sheet is conservatively financed with its long-term debt sitting at $5.6 billion on total assets of $17 billion – most of which is the value of oil fields.

Diamondback would be my top pick in the oil sector as a result of great operating margins, solid balance sheet, and a forward P/E multiple of 9.4.

Exxon Mobil (XOM)

Aside from offering an attractive 5.4% yield, Exxon Mobil shares should be favorably positioned to move higher in the current environment, especially as oil drillers have been progressively expanding their production quotas to respond to higher crude demand.

Although this firm is not necessarily the most attractive based on its cash flow situation and balance sheet, its profit margins are still good enough to deserve consideration. Meanwhile, at a forward price-to-earnings ratio of 16, much of the growth that the company has ahead of it as a result of the so-called commodity supercycle doesn’t seem to be fully priced in just yet.

EOG Resources (EOG)

With operating margins of almost 40% displayed in the past three years, excluding pandemic-related impairments in 2020, this conservatively financed oil drilling company seems to be very efficient at keeping costs in check while delivering solid gains for shareholders.

By the end of its 2020 fiscal year, EOG had a net debt of $9 billion on total assets of $35 billion with $29 billion in fixed assets, which includes the company’s oil fields in multiple locations around the world such as Mexico, Trinidad and Tobago, and the United States.

EOG Resources currently offers a 1.9% dividend yield and it is being valued at 14 times its next 12-month earnings which makes it a solid value play in the oil sector, especially if oil prices continue to trade at these historically elevated levels for a while.

Royal Dutch Shell (RDS.A)

Considering the stock’s current 2.8% dividend yields, which seems fairly stable based on the company’s cash flow generation capacity and its historical net profit margins ranging, which have ranged from 3% to 6% in the past few years, Shell seems fairly undervalued at a forward P/E ratio of 8.6.

Meanwhile, the company managed to refinance a portion of its debt at a lower rate last year, which should result in lower interest expenditures and higher bottom-line profitability if oil prices remain high in the following years.

Halliburton Company (HAL)

The worst days of this oil services firm might be behind as oil rigs across the world continue to be moved to active status as indicated by the latest survey from Baker Hughes.

According to data from the research firm, a total of 182 wells have been put to work in the past 12 months in the United States alone while another 72 have been moved to active status in Canada.

Since North America accounts for nearly half of HAL’s revenues, one could see the company’s profitability staging a comeback in the following quarters. Meanwhile, in terms of valuation, the firm should be able to deliver $1 billion or so in free cash flows this year, which results in a P/FCF multiple of 21 based on today’s price of $24.19 per share.

That valuation doesn’t seem necessarily lofty and could create enough room for upside potential. From a technical perspective, if the price of HAL manages to climb above the $25 threshold chances are that the current uptrend might accelerate toward the $38.5 level for an appealing 51.5% potential gain.

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