When a sector has as spectacular a year as energy stocks have had in 2022, it gets harder to find ways to allocate new money into the sector. Valuations have gone up alongside commodity prices and that's attracting investors that had shunned the sector during the previous downturn.

Just because there are fewer great investments in the sector today doesn't mean they no longer exist. Two oil stocks that stand out today are oil and gas giant Equinor (EQNR -2.41%) and offshore rig company Noble Corporation (NE -1.20%). Here's why you may want to consider them for your portfolio today. 

The integrated oil and gas company no one is talking about

It's rather amazing how Equinor's profitability has flown under investors' radars so far in 2022. The Norwegian oil and gas giant has been reporting stellar results that would make some of its larger oil and gas giant peers blush. Over the previous four quarters, Equinor has generated $30.85 billion in free cash flow. It is less than what both Chevron and ExxonMobil put up in the quarter, but when you compare free cash flow to their respective market caps, Equinor is generating much more cash per share than the other two by a pretty wide margin.

Company Free Cash Flow (trailing 12 months) Market Capitalization Free Cash Flow Yield
Equinor $30.85 billion $117.8 billion 26.1%
Chevron $36.69 billion $349.9 billion 10.4%
ExxonMobil $59.59 billion $455.2 billion 13.1%

Data source: Y!Charts.

It's fair to argue that Equinor's results are receiving a significant boost from the European energy crisis. Investors shouldn't expect the company to generate a free cash flow yield greater than 25% in the future. That said, the windfall profits Equinor has received recently have been transformative for the business. It now has a $12 billion net cash position (that's cash minus all debt outstanding) and is the only integrated major with more cash and short-term investments than total debt outstanding.

Even with a strong balance sheet, management's capital investment plans are rather modest and are targeting some high-return projects. For example, the expansion of its operations at a major reservoir on the Norwegian Continental Shelf has estimated unit production costs of less than $2 per barrel of oil equivalent. All of its sanctioned oil and gas projects until 2030 have a break-even price of less than $35 per barrel. Included in its capital spending plans is between 12 and 16 gigawatts of offshore wind projects that will help the company meet its renewable energy goals and become a net zero carbon emission company by 2050.

It would be a little disingenuous to use a price-to-earnings ratio to value Equinor considering the boost from European energy prices. Still, the company's operations with its realized prices more in line with global prices would generate good returns, and it is in a stellar position over the next few years to invest and reward shareholders.

The return of offshore

The offshore rig industry was, arguably, the hardest-hit sector during the last downturn. Demand for offshore drilling ground to a halt as producers tightened their belts. All but a select few companies in the sector filed for bankruptcy. Hundreds of rigs were sent to the scrap yard. The industry, as a whole, is a fraction of the size it was a few years ago.

Ironically, the purge of excess rigs and bankruptcy restructurings are precisely what makes offshore rigs, and particularly Noble Corporation, a compelling investment right now. Many of the players in this space have reemerged from bankruptcy procedures with significantly lower debt loads. That translates to lower interest expenses and better cash flow. With fewer rigs able to take on new work, the market for rigs is demonstrably tighter today. A tighter market means rig companies can command better day rates when leasing to producers. 

For example, Noble reported in its most recent fleet status report that it agreed to a contract extension for one of its most advanced rigs with an estimated rate of $422,500 per day. By comparison, the current contract rate for that rig is $295,000 per day.

Analysts at Rystad Energy project 2023 will have the most offshore project approvals in over a decade at a time when the market for rigs is tightening and there aren't a lot of new rigs under construction. With much of Noble's fleet set to roll off existing contracts in 2023, it could be poised to see huge dayrate gains for much of its fleet. With few capital spending plans and few debt obligations, management projects it will be able to generate considerable free cash flow over the next few years. 

Two under-the-radar energy buys

Equinor and Noble aren't typically the companies that come to mind when considering energy stocks. But both companies are taking advantage of unique situations to position themselves incredibly well for the future. What's more, both companies appear to be reasonably valued considering the rate at which they are generating free cash flow. If you are looking for two energy stocks to diversify your portfolio, these two should be at the top of the list right now.