With the price of crude oil down 40% from a peak of $122 per barrel reached in June 2022, the good times look to be over for energy stocks. While the S&P 500 Energy Index is down nearly 10% this year, the broader benchmark S&P 500 index is up 18%.
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The share prices of most oil companies are in the doldrums. This is especially true of the biggest oil companies — the so-called “Super Majors” — that enjoyed record profits throughout 2022 and returned much of the windfall to stockholders in the form of increased dividend payments and share repurchase programs.
Now, many oil companies are cutting their quarterly dividends and revising their earnings forecasts as crude prices slump and their earnings return to more typical levels. And while the downturn might seem disheartening to investors, especially after such a big run, the reality is that the industry-wide decline has created a buying opportunity.
Intrepid long-term investors can now buy the shares of leading oil companies on the cheap. Here are the three most undervalued oil stocks to buy now.
Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) has reversed lower, erasing much of its gains from 2022. Today, OXY stock is trading down 3% on the year. Over the past 12 months, the share price has declined 1%. And through five years, Occidental Petroleum’s stock has deflated 28%.
Yet, despite the disappointing share price performance, OXY stock remains a favorite security of famed investor Warren Buffett. Every time Occidental Petroleum’s share price falls below $60, Buffett buys more of the stock. He now owns 25% of the company.
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Buffett has continued buying the stock throughout this year as the share price has continued to decline. His current stake in the company, worth $13.46 billion, is significant as he only began acquiring shares in early 2022 before Russia invaded Ukraine and crude oil prices spiked.
Despite the pullback in oil prices and decline in OXY stock, Buffett is sticking with his investment and continues to build it, though he has said he doesn’t plan to take a controlling stake in the company. Buffett’s resolve can be viewed as a vote of confidence in OXY stock.
Chevron (CVX)
U.S. oil giant Chevron (NYSE:CVX) has seen its stock hit hard this year, falling 13% since January. While the company is still clinging to a 10% gain over the last 12 months, that increase is evaporating as the share price trends lower.
Trading nearly 20% below its 52-week high and at just eight times forward earnings estimates, CVX stock is looking undervalued at current levels. Chevron’s shares also offer an attractive quarterly dividend of $1.51 a share, a good yield of 3.92%.
Chevron raised its dividend and announced a new $75 billion stock buyback program earlier this year as it reported strong profits. The company most recently reported that its net profit rose 5% to $6.57 billion or $3.46 per share in this year’s first quarter. That was better than Wall Street consensus estimates for a flat profit at $3.38 a share. The company attributed the rise in its Q1 profit to its oil refining business, where higher margins helped income grow five-fold to $1.8 billion. Chevron reports its Q2 earnings on July 28.
Shell (SHEL)
European oil major Shell (NYSE:SHEL) is doing everything to keep shareholders from hitting the sell button. In mid-June of this year, the company announced that it is raising its quarterly dividend by 15% to 54 cents a share, giving it a hefty yield of 3.53%. The company also announced plans to increase its share repurchase program for the just completed second quarter to $5 billion from $4 billion in previous quarters. And, Shell announced that it no longer plans to cut its oil production 20% by 2030.
The positive news has helped SHEL stock to outperform its peers. Year-to-date, Shell’s share price is up 9%. However, the current year’s performance can’t mask the poor long-term results. Over the past five years, Shell stock has declined 12%. While the company reported a record $40 billion profit in 2022, that success is softening with crude oil prices trading below $75 per barrel. The company’s most recent results were boosted largely by fuel trading.
SHEL stock is currently trading at five times forward earnings, suggesting it’s undervalued.
On the date of publication, Joel Baglole did not have (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.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
