Oil and gas stocks can be some of the most undervalued stocks an investor can stumble upon. One of the reasons why is because of the stigma that surrounds investing into non-renewable energy assets, and this sentiment is prevalent whether we’re talking about an everyday market-watcher or a professional investor at a Wall Street firm. Another reason why oil and gas public shares are trading at nice discounts is due to the fact many of these companies generate their net income from a resource that is not only depleting in quantity but is volatile in price as well.
Oil and, by extension, gas prices have had a volatile couple of years. In 2022, Russia’s invasion of Ukraine and the Western-led sanctions that ensued thereafter created an unstable environment for crude prices. Brent crude prices rallied as much as 68% at one point in 2022. Though the war has dragged on, and OPEC has made several moves to curtail supply, crude prices have relatively stabilized but remain elevated if we come compared to before the Russo-Ukraine conflict.
Moreover, high oil demand from Asia and steady supply from south America and the United States have kept many oil & gas companies busy. Below are three companies boasting cheap multiples and have an intact value proposition.
Frontline (FRO)
Frontline (NYSE:FRO) is a seaborne transporter of oil and oil-based products. Based in Cyprus, the oil tanker firm manages a fleet of 86 vessels (43 VLCCs, 25 Suezmax tankers, 18 LR2/Aframax tankers), which have an aggregate capacity of approximately 18.8 million DWT (deadweight tonnage). This means, Frontline’s fleet is both large and versatile and can travel a variety of distances.
In 2023, Frontline raked in $1.8 billion in revenue, representing a 26% year-over-year increase from 2022, and $656.4 million in net income. High crude demand from Asia, the supply of which is not just being sourced from the Middle East but also from the United States, Brazil, and Guyana, have helped keep oil tankers like Frontline busy. A drought that has impacted traffic via the Panama Canal also kept shipping rates high, as sometimes it took weeks for ships to finally pass through the corridor. Most recently the shipping traffic through Suez Canal has slumped following Yemen’s Houthis attacking ships following Israel’s ongoing onslaught of Gaza. These events continue to be driving factors of shipping rates in 2024, and Frontline is positive about the year’s outlook.
The oil tanker company’s shares only trade at 7.1x forward earnings and given the firm’s dividend yield sits at a juicy 9%, investors should definitely put this oil and gas stock on their buy-list.
DHT Holdings (DHT)
DHT Holdings (NYSE:DHT) is another oil tanker company, albeit smaller than Frontline, that investors should consider looking into if they’re willing to make a bet the oil and gas sector. In operation since 2005, DHT manages a fleet of 24 very large crude carriers (VLCCs). By transporting large volumes of crude oil, having a fleet composed of just VLCCs can help a tanker company achieve economies of scale quickly. That is to say, the cost per barrel of oil transported will be generally lower compared to smaller tankers, making long-haul routes particularly cost-efficient.
In DHT’s first quarter earnings report for fiscal year 2024, the tanker firm noted how the balance between OPEC nations cutting their supply and non-OPEC countries, particularly the U.S., Brazil, and Guyana, filling those demand needs has not ceased to be the case in 2024. Due to these expanded transportation distances as well as heightened geopolitical tensions DHT expects “rewarding times ahead.”
Furthermore, DHT aims to pay out a 100% of its net income to shareholders as a part of its capital allocation policy. DHT generated $161.3 million in net income last year at a 28.8% margin, and nowadays, DHT trades at just 7.1x forward earnings. As of their last fiscal quarter, the oil tanker firm’s dividend yield is high at 9.75%, which contributes to the company’s undervalued characteristic.
Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) is a Texas-based oil and gas giant that not only explores and develop the commodity but also engages in the development and sale of chemicals to companies operating in a variety of industries. The oil and gas firm has made quite a name for itself after acclaimed value investor Warren Buffet bought a significant stake in 2019 through his investment company, Berkshire Hathaway (NYSE:BRK-A).
In particular, Berkshire invested $10 billion in Occidental Petroleum in exchange for preferred stock that yield an 8% annual dividend. With Berkshire’s backing, Occidental was able to outbid oil and gas firm Chevron (NYSE:CVX) for Anadarko Petroleum. Occidental Petroleum ended up purchasing Anadarko for $55 billion, a particular large deal in the oil and gas industry. The move also represented a significant expansion of Occidental’s oil and gas assets, particularly in the Permian and DJ Basins, some of the most prolific oil-producing regions in the United States.
Ultimately, Occidental has a much better position in the U.S. industry, and the firm’s low trading multiple – at 14.3x forward earnings – makes it a good long-term bet.
On the date of publication, Tyrik Torres 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.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.