The oil market continues to look for direction. After running up above $85 a barrel to start the year, West Texas Intermediate crude oil, the American standard, is back below $80 as tensions in the Middle East ease and on growing signs that the U.S. economy is slowing. At the same time, a warmer than expected winter in Europe and North America has led to a glut of natural gas, depressing prices for that energy product. But that could mean opportunity for investors looking for undervalued oil and gas stocks.
The current state has impacted the finances of oil and gas companies, which have reported generally poor results for this year’s first quarter. Slumping prices and a decrease in refining margins have pulled down revenues and profits at most major energy companies. It’s a far cry from 2022 when crude oil was trading above $120 a barrel, leading to record profits for producers.
If there’s a silver lining to the current state of the energy market, it’s that it has led to attractive valuations among oil and gas securities. Here are the three most undervalued oil and gas stocks to buy in May 2024.
Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) is showing signs of life with its share price having risen 6% so far in 2024. Still, even with the year-to-date (YTD) gains, OXY stock is up only 12% in the last 12 months. The shares look a little undervalued trading at 17 times future earnings estimates, which is below the current average price-to-earnings (P/E) ratio of 25 among companies listed on the benchmark S&P 500 index. Occidental Petroleum also pays its shareholders a quarterly dividend of 22 cents a share, giving the stock a yield of 1.37%.
Like most producers of crude oil and natural gas, Occidental’s earnings have taken a hit due to sliding prices and compressed refining margins. The company most recently reported a 40% year-over-year (YOY) decline in its earnings per share (EPS). Still, there are reasons to be bullish on OXY stock. In addition to an attractive valuation, the company is in the process of buying privately held energy producer CrownRock for $12 billion. The acquisition will provide Occidental Petroleum with 94,000 net new acres of land in the Permian Basin of Texas, the largest oil area in America.
OXY stock also continues to get a vote of confidence from legendary investor Warren Buffett who has built a nearly $16 billion stake in the company.
Chevron (CVX)
Another oil stock that Warren Buffett also owns is Chevron (NYSE:CVX). In fact, at just over $20 billion, Buffett’s stake in Chevron is even larger than the one he has in Occidental Petroleum. The Oracle of Omaha no doubt likes the valuation on CVX stock, which is currently trading at 15 times future earnings estimates. A quarterly dividend of $1.63 a share, for a hefty yield of 4%, is also enticing. Like OXY stock, Chevron’s share price has been moving in the right direction lately, having gained 10% on the year.
Chevron recently posted mixed first-quarter financial results as its profits declined due to lower margins at its refineries. The company reported EPS of $2.93 versus $2.87 that was forecast amongst analysts. The oil major’s profit was down 16% from a year earlier. Revenue in the quarter came in at $48.72 billion compared to $50.66 billion that was estimated on Wall Street. Chevron’s executive team blamed the results on lower sales margins at refineries, and lower natural gas prices due to excess global supply.
Management added that they paid $3 billion in dividends and repurchased nearly $3 billion of stock during Q1 of this year. Surely music to Buffett’s ears.
ExxonMobil (XOM)
Looking even cheaper right now than either Occidental Petroleum or Chevron is oil major ExxonMobil Corp. (NYSE:XOM). The company’s stock is up 15% year to date but currently trading at only 14 times future earnings projections. A quarterly dividend of 95 cents a share gives XOM stock a strong yield of 3.27%. ExxonMobil remains the biggest oil company in America. Given its breadth and exposure, it should come as no surprise that the company’s earnings have also been impacted by price declines and tight margins.
ExxonMobil announced mixed Q1 financial results as it grapples with weaker prices for natural gas, as well as a drop in refining margins. The company reported EPS of $2.06 versus $2.20 that was expected by analysts who track the company’s progress. Profits were down 12% from a year earlier. Revenue totaled $83.08 billion compared to $78.35 billion that was forecast. The mixed results were mostly due to natural gas prices that have declined nearly 40% this year because of warmer winter weather.
However, the drop in the fuel business was partly offset by ExxonMobil’s chemical products segment, where profits more than doubled to $785 million from a year earlier.
On the date of publication, Joel Baglole 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.