Oil prices cratered during the early days of the pandemic, taking oil stocks with them. However, they have rallied sharply since those early days as the global economy has slowly reopened and gotten back to normal. Meanwhile, they got an added boost last year following Russia's invasion of Ukraine.
Crude prices and oil stocks have cooled off over the past several months on macroeconomic concerns. However, they could heat back up this summer as demand surges past supplies. That could make now a great time to buy some once-red-hot oil stocks before they surge again. Three that stand out are Devon Energy (DVN -0.89%), Occidental Petroleum (OXY -0.09%), and Marathon Oil (MRO -1.04%).
The catalyst
Recession worries have weighed on oil prices and oil stocks because of the concern that it could sap demand for crude. However, weakening demand isn't in the forecast. The International Energy Agency (IEA) recently published its May oil market report. It expects crude oil demand to rise by 2.2 million barrels per day (BPD) this year, which is 200,000 BPD higher than its April outlook.
A big driver is rebounding demand in China as the country fully reopens following the pandemic. The IEA noted that Chinese demand "continues to surpass expectations" and set an all-time record high at 16 million BPD last month.
Meanwhile, supplies are struggling to keep up. Significant outages in Iraq, Nigeria, and Brazil have hit global supplies. In addition, wildfires in Canada and extra cuts by OPEC+ will put further pressure on supplies.
These factors led the IEA to comment, "The current market pessimism, however, stands in stark contrast to the tighter market balances we anticipate in the second half of the year, when demand is expected to eclipse supply by almost 2 million BPD." That massive gap between supplies and demand will likely cause oil prices to rally.
These once-red-hot oil stocks appear poised to rebound
Devon Energy, Marathon Petroleum, and Occidental Petroleum are all up an eye-popping 300%+ over the past three years:
However, they're currently well off their recent highs. Deven Energy is down more than 35% from its 52-week high. The company believes this sell-off makes its stock an attractive buy. That's evident in the comments from CEO Rick Muncrief on the first-quarter call. He stated:
We continue to see attractive value in repurchasing our shares, which we believe traded a significant discount to our intrinsic value. To capitalize on this compelling opportunity, we made substantial progress advancing our buyback program by repurchasing $692 million of shares year to date. In addition to our corporate buyback activity, multiple members of our management team, myself included, have also demonstrated their conviction in Devon's value proposition by purchasing stock in the open market over the past few months.
Devon recently backed that conviction by boosting its share repurchase authorization by 50% to $3 billion. Higher oil prices would give Devon more cash to buy back its cheap shares.
Occidental is also using its oil-fueled cash flows to repurchase shares, which currently sit 20% below its 52-week high. One of the company's cash flow priorities for this year is to "continue allocating excess free cash toward share repurchases," stated CEO Vicki Hollub on its first-quarter call. This would help trigger the company's ability to repurchase preferred shares owned by Warren Buffett's Berkshire Hathaway. The company "believe[s] that these actions will further our goal of continued enterprise value rebalancing for common shareholders and serve as a catalyst for future common equity appreciation." A rally in oil prices would enable Occidental to generate more cash to repurchase common and preferred shares, which should boost the common stock price.
Marathon Oil has also been buying back stock. CEO Lee Tillman stated on the first-quarter call:
We have now executed over $1.6 billion of share repurchases since last October, driving an 11% reduction to our outstanding share count in just seven months. And those shares were repurchased at a price below $19 a share, a discount of over 25% relative to today's trading price, demonstrating the power of consistent dollar averaging...we continue to believe buybacks remain an excellent use of capital and consisting with that view, our board of directors has increased our outstanding buyback authorization $2.5 billion."
Again, higher oil prices would allow the company to produce more free cash flow, which it can use to buy back its attractively priced shares more quickly.
The fuel to resume their surge
Devon Energy, Occidental Petroleum, and Marathon Oil have surged as oil prices rebounded from their pandemic-driven low. However, the trio could have more room to run since they've fallen off their peaks. That's allowed the companies to buy back more stock, which along with the prospect of higher oil prices in the future, could give them the fuel to restart their rally.
