Oil is a bigger part of your life than you may realize. You may cringe at the price of gas at the pump or balk at an electricity bill with new rates, but that’s not where your relationship with oil prices stops. Fossil fuels are used to make plastic and a key ingredient in many medical products, lubricants, rubber products, and a wide range of other goods.
Oil isn’t just a way to propel a vehicle or heat a space; it’s a massive and complex market that likely has its place in nearly every minute of your day-to-day life. After all, whether you’re using a device with any plastic components or walking on an asphalt sidewalk, you’re using an oil product.
With the oil sector being one of the largest, most valuable markets in the world, it should come as no surprise that many of the leaders in the space are also among the top picks on the stock market.
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Best Oil Stocks to Buy
The world’s largest oil companies have long been coveted assets on Wall Street. Energy stocks represent some of the largest companies in the world. At the same time, these massive companies are known for paying compelling dividends, making them great options for investors looking for quality dividend stocks.
There’s a strong argument that stocks across the segment currently are undervalued and poised for a strong recovery, and that argument has some pretty solid footing.
When the coronavirus took hold, consumers stayed indoors, travel ceased, and demand for oil took a big hit, leading to significant drawdowns in crude oil prices. However, times have changed, and consumers aren’t letting COVID-19 maintain control over their lives or their plans to enjoy a vacation from time to time.
As a result, an economic recovery is taking place, which is leading to growing demand for crude oil and the many products derived from it.
With oil stocks being undervalued in general, should you go jumping on the first opportunity to buy one? No! As with any other class of stock, not all companies in the oil category are created equal. But if you’re interested in trying your hand in the sector, some of the best names to consider are below.
1. Chevron (NYSE: CVX)
An Industry Leader With a Solid Balance Sheet and Attractive Dividend
- Dividends: The stock offers one of the highest dividend yields in the sector. Over the past five years, the lowest yield investors received was 3.23%, with the highest being 8.96%. The average yield on the stock has been a whopping 4.39%, which is impressive in any industry.
- Fundamental Metrics: The stock trades with a forward-looking price-to-earnings ratio (P/E ratio) of under 16, compared to an industry average of around 17. Its price-to-sales ratio (P/S ratio) is under 2, making it a highly undervalued play compared to its peers.
- Recent Financial Results: In the company’s most recent earnings report, investors were pleasantly surprised with more than 126% year-over-year growth in revenue and a more than 137% year-over-year increase in net income. And both revenue and earnings per share (EPS) smashed analyst expectations.
- Analyst Opinions: According to TipRanks, there are 14 analysts covering the stock, with 10 rating it a Buy and four rating it a Hold. No analysts currently rate the stock a Sell. With an average price target of $127.92, analysts suggest the stock could climb by nearly 30% over the next 12 months.
You probably already know the name Chevron. It’s one of the largest oil companies in the world with a market capitalization of more than $191 billion. The company operates one of the most successful gas station chains in the world, and chances are you’ve filled up at one of their more than 7,800 locations.
However, the company isn’t just the operator of an uber-successful gas station business; it’s active in every part of the oil industry from exploration to production and refining. It’s also a major player in the production of natural gas.
As such, it should come as no surprise that the company has a solid balance sheet. The company’s success as a leader gave it the cash flow it needed to get through the recent pandemic and several economic recessions in the past.
Although Chevron got its footing as a fossil fuel producer, it realizes that times are changing. The company has poured massive amounts of money and research into renewable fuels and energy. Today, it is responsible for the production of more than 500 megawatts of clean energy, which is enough to power nearly half a million homes and offices.
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2. Exxon Mobil (NYSE: XOM)
A Legacy Oil Company Joining the Clean Energy Movement
- Dividends: As with most successful energy companies, XOM investors are no strangers to impressive dividend payments. Over the past five years, the lowest yield experienced was 3.22%, with 11.07% being the maximum. The average dividend over the past half decade was a jaw-dropping 5.11%.
- Fundamental Metrics: The valuation metrics of the stock are impressive, with a forward P/E ratio of just over 11 and a P/S ratio of just 1.11, suggesting Exxon represents one of the most undervalued plays among quality stocks in the energy industry today.
- Recent Financial Results: In the most recent earnings report representing the quarter that ended in June 2021, revenues and net income were up more than 104% and 534% respectively on a year-over-year basis. These results beat analysts expectations for earnings by more than 10% and overall revenue by more than 4%.
- Analyst Opinions: Analysts have mixed opinions about the stock. According to TipRanks, 13 analysts currently cover the stock, with five Buy and seven Hold ratings; there is one analyst who rates it a Sell. Nonetheless, the average analyst’s price target of $69.50 per share paints a pretty appealing picture, suggesting a more than 25% potential upside.
Exxon Mobil is another massive oil and gas company in the energy sector. Like Chevron, most Americans have filled up at an Exxon Mobil station at least once or twice. With more than 12,000 locations across the country, it’s hard to avoid the brand.
That’s one of the many reasons the company has grown to become a behemoth with a market capitalization of more than $235 billion.
Exxon Mobil is actively involved in the exploration, production, refinement, and distribution of oil, oil-related products, and natural gas.
The company also has no plans to be left in the dust as the clean energy movement sweeps the globe. It has entered into several agreements with renewable fuel producers.
It’s also investing heavily in the development of renewable energy technology, with a special focus on hydrogen fuel cell energy, a technology that could reduce carbon emissions from electricity production and power vehicles while producing only water as a byproduct.
3. ConocoPhillips (NYSE: COP)
A Top Oil Producer in Alaska With Global Reach and Impressive Growth
- Dividends: While it’s not the strongest dividend payer on this list, the company offers respectable income. Over the past five years, the lowest yield on the stock was 1.40%, with the highest being 6.40%. The average over the past five years has been 2.58%.
- Fundamental Metrics: From a fundamental standpoint, the stock also offers some compelling metrics. The forward P/E and P/S ratios come in at 11.98 and 2.33, respectively, suggesting an undervaluation when compared to the overall energy space.
- Recent Financial Results: With revenues up more than 243% and net income up more than 704% year-over-year, ConocoPhillips has some of the most impressive growth on the list. In the most recent financial report, the company beat analyst expectations for earnings per share, but generated a slight miss in overall revenue.
- Analyst Opinions: Analysts seem to agree that COP is setting the stage for strong growth ahead. Currently 20 analysts cover the stock, with 19 of them rating it a Buy and one rating it a Hold. Not a single analyst rates the stock a Sell. Moreover, over the next year, analysts expect the stock will climb to be worth $76.63 per share; that’s more than 35% above its current price.
ConocoPhillips may not be a household name, but don’t let a lack of familiarity with the name fool you; the company is a massive player in the oil and energy space.
The company is the top oil producer in Alaska, operating exploration leases that span more than 1.3 million acres of undeveloped land. The company is also one of the state’s top producers of natural gas.
However, Alaska isn’t the company’s only base of operations. ConocoPhillips is active in the exploration and production of oil in the Lower 48 and a major player in Texas, the country’s most fertile land for oil producers. It also has operations in Asia, Canada, the Middle East, Europe, and North Africa.
4. Devon Energy (NYSE: DVN)
A Domestic Oil and Energy Company With a History of Strong Growth
- Dividends: This stock doesn’t take the top spot as far as dividend payments go, but it’s dividends provide meaningful income. Over the past five years, its high and low yields have been 6.65% and 0.54%, respectively, with the average yield over this term being 1.53%.
- Fundamental Metrics: From a valuation standpoint, this is another undervalued play that investors would be wise to consider. The P/E and P/S ratios on the stock are 11.25 and 2.31, respectively.
- Recent Financial Results: Another company producing compelling growth in terms of revenue and earnings, Devon smashed analyst expectations in all respects with its last financial report. Revenues were up more than 294% and net income climbed more than 138% on a year-over-year basis.
- Analyst Opinions: At the moment 16 analysts are covering the stock, of which 14 rate it a Buy, two rate it a Hold, and none rate it a Sell. On average, analysts expect the stock to climb more than 27% over the next year to an average price target of $38.13 per share.
Devon Energy is another massive oil and natural gas producer, which has grown to be worth more than $20 billion and employ more than 4,000 people around the world.
While others on this list may be focused on global activities, Devon keeps most of its operations right here in the United States. The energy company is primarily focused on the exploration and production of onshore oil and has become a major player in the Texas oil industry.
The company’s production is nothing to shake a stick at either. On a quarterly basis, the company produces about 300,000 barrels of crude oil, 125,000 barrels of liquified natural gas, and about 920 million cubic feet of natural gas.
The one drawback to investing in Devon Energy is its apparent lack of desire to capture clean energy opportunities. On its website, the company argues that clean energy isn’t expected to overtake gas in electricity generation until 2045 and that gasoline and diesel fuel will account for about 75% of total consumption in transportation through 2050.
As a result, the company says it plans on continuing to produce the oil and gas the world needs, kicking the clean energy can down the road until it is more pertinent to consider a transition — a decision that could prove to be a mistake in the very long run.
Nonetheless, as an investment in today’s market, DVN is one of the best in its industry.
5. Pioneer Natural Resources (NYSE: PXD)
The Largest Acreage Holder in the Productive Cline Shale
- Dividends: Unfortunately, Pioneer isn’t one of the best dividend payers, but investors can expect to generate moderate income through their investments. Over the past five years, the highest yield has been 2.70% and the lowest was 0.04%. The average yield investors enjoyed over the past five years was just 0.66%.
- Fundamental Metrics: While the dividends offered won’t be turning any heads, there’s a clear undervaluation argument here. The forward P/E and P/S ratios on the stock currently come in at 12.35 and 2.71, respectively.
- Recent Financial Results: Unfortunately, Pioneer missed expectations for both revenue and earnings on its last report, but there’s a strong argument that analyst expectations were far too bullish. On a year-over-year basis, revenue still increased more than 274%, with net income experiencing more than 184% growth.
- Analyst Opinions: Even with the recent miss, analysts seem to love the stock. Of the 17 that currently cover it, 14 rate it a Buy and three rate it a Hold, with no Sell ratings to speak of. Also, analysts expect the price of the stock to climb to $213.94 per share over the next year, representing the potential for more than 40% gains.
Pioneer Natural Resources is yet another massive oil and energy company, boasting a market cap of more than $36 billion. The company is one among many producers in the Cline Shale, part of the oil- and gas-bearing Wolfcamp Shale Formation in Texas, but it’s far from the average producer on the land.
Pioneer is currently the largest acreage holder in the Cline Shale, producing hundreds of thousands of barrels of oil per year, but it’s not just the size of the acreage that sets this company apart.
Rather than simply operating its business as traditional oil and energy producers would, the company focuses on using technological innovation, increasing efficiencies within its operations. This use of technological innovation to create operational efficiencies gave the company the ability to reduce the time needed for horizontal drilling completion by seven days per well.
Unfortunately, as with Devon, Pioneer doesn’t seem to be too concerned with the clean energy movement. While the company talks about sustainability on its website, it makes no real mention of investments in clean energy technology or infrastructure. Instead, the company points to its focus on operational efficiencies as a sustainable way to go about business in the traditional oil and gas industry.
The lack of interest in the clean energy sector may come back to bite Pioneer in the future. But in the meantime, the company offers a compelling investment opportunity.
6. Royal Dutch Shell (NYSE: RDS.A)
An Income Investor’s Dream, Paying Massive Dividends
- Dividends: Royal Dutch Shell is one of the largest dividend payers on the market today, in the energy space or otherwise. Over the past five years, the lowest yield investors have had to accept has been 3.10%, with the highest clocking in at a whopping 19.20%. On average, the yield on the stock has been 6.45%.
- Fundamental Metrics: While most stocks on this list are undervalued compared to their peers, this stock takes that to a whole new level, with a P/E ratio of just over 8 and a P/S ratio of only 0.77.
- Recent Financial Results: Not only did the company recently beat analyst expectations in all areas, earnings came in more than 50% higher than the best of expectations. Revenues and net income were up more than 86% and more than 118%, respectively.
- Analyst Opinions: At the moment, there are five analysts that have shared their opinions about Royal Dutch Shell, three of which rate the stock a Buy and two who rate it a Hold. The average expectation among analysts is that the stock will climb to $54.33 per share over the next year, representing gains of more than 35% from today’s price.
Most Americans recognize Royal Dutch Shell from its network of more than 6,000 Shell branded gas stations in the U.S. With a market cap of more than $154 billion and average trading volume of nearly 5 million shares per session, the stock is one of the most popular gas stocks on the market today.
However, like other household names on this list, the company is far more than simply the operator of a chain of successful gas stations. It’s also actively involved in the exploration, production, refining, and distribution of oil, oil-related products, and gas around the world.
Moreover, Shell knows that the world’s view toward energy is changing, and that it will need to change along with the times to maintain its leadership position for the long run. That’s why the company is investing in clean energy in two important ways:
- Infrastructure. Shell is investing a massive amount of money into solar and wind energy, helping to develop new technologies and setting the stage for large renewable power plants.
- Transportation. The company is also active in the clean transportation space, investing heavily into charging and battery technology for electric vehicles, fuel cell technology for potential fuel-cell-powered vehicles, and renewable fuels for traditional combustion engines.
7. Schlumberger (NYSE: SLB)
Providers of the Equipment and Technology the Oil and Energy Sector Needs to Operate
- Dividends: While it’s not always consistent, the stock is known for offering compelling dividends. Over the past five years, the lowest yield on the stock has been 1.37%, with the highest at 16.60%. On average over the past five years, the yield has been 4.37%.
- Fundamental Metrics: From a fundamental standpoint, the company is a bit overvalued compared to its oil-producing counterparts. However, if you compare the company to other technology companies, it begins to look more undervalued. The stock trades with P/E and P/S ratios of 25.32 and 2.09.
- Recent Financial Results: In the last financial report, Schlumberger blew analyst expectations out of the water with respect to both revenue and earnings. On a year-over-year basis, revenues were up 5.19%, with net income climbing 112.55%.
- Analyst Opinions: Analysts expect significant growth out of the stock over the next 12 months, as can be seen by the average price target of $34.83, suggesting the potential for well over 20% upside. These targets were averaged across six analysts, four of whom rated the stock a Buy and two of whom rated the stock a Hold. There are no Sell ratings to speak of.
Schlumberger doesn’t worry about its own mining operations. Instead, it provides equipment, technologies, and ways to bring efficiency into the energy development process. Schlumberger allows oil producers to focus on producing oil by handling logistics and setting up more efficient systems for their customers.
The company has made a decent name for itself too, growing to be worth more than $39 billion.
Schlumberger is quickly becoming a major player in the green energy movement. Knowing that oil is used in so many ways and that the production of oil will be necessary for decades or even centuries to come, the company is focused on decarbonizing the process.
It expects its own operations to be net-zero emissions by 2050, and it’s working with some of the world’s leading oil exploration and production companies to help them achieve similar goals.
To do so, the company’s helping introduce electric equipment into customer operations and offering state-of-the-art technologies that come with reduced energy consumption. As the world looks to shift toward clean energy, Schlumberger is in a unique position to be a pivotal player in a quickly emerging industry.
8. Marathon Petroleum (NYSE: MPC)
An Oil Giant Making Large Investments in Clean Energy
- Dividends: Marathon has long been a strong income play for investors looking for dividends. Over the past five years, its lowest yield was 1.95% and the highest was 13.06%. On average, the yield on the stock was 3.75% during this period.
- Fundamental Metrics: Some may be concerned that the stock has a high forward P/E ratio of 144.93. However, many investors point to the incredibly low P/S ratio of 0.44 as a sign that the stock is undervalued. These investors argue that earnings have been significantly damaged by the pandemic and that as the oil industry recovers, so too will the company’s profitability, resulting in a more level valuation in the long run.
- Recent Financial Results: The most recent earnings report was overwhelmingly positive for Marathon Petroleum. The company smashed both revenue and earnings expectations with overall revenue growing more than 143%. Its growth in net income was overwhelmingly positive as well, rising from negative territory in the same quarter last year to more than $8 billion in the most recent quarter.
- Analyst Opinions: All eight analysts covering the stock rate it a Buy. Moreover, the average price target on the stock is $71.75, representing the potential for more than 21% growth over the next year.
Marathon gas stations are all over the place in the U.S. There are more than 6,900 of them strewn from coast to coast. However, Marathon isn’t just a gas station chain; the name represents an oil giant that’s worth more than $37 billion. It is active in the exploration and production of oil and natural gas. It also refines raw energy materials and distributes oil and oil-related products across the U.S.
As the world works to go green, Marathon Petroleum has no interest in being left behind. It’s making some of the largest investments in green energy you’ll find when you compare its moves to other oil producers making the leap of faith.
The company is one of the largest producers of renewable fuels in the world. At its Dickson facility in North Dakota, the company produces 184 million gallons of renewable fuel per year, and it’s working to convert the refinery in Martinez, California, into a renewable fuel production facility capable of producing around 730 million gallons of renewable fuel per year.
That doesn’t include the company’s many other renewable energy investments, including its Cincinnati Renewable Fuels Biodiesel facility or one of several other investments the company is making in the green energy movement.
9. Phillips 66 (NYSE: PSX)
Among the Largest Midstream And Downstream Players in Oil, Generating Strong Growth and Dividends
- Dividends: As with most companies on this list, Phillips 66 has a strong history of providing investors with meaningful income. In the past five years, the average dividend yield on the stock has been 3.75%, with a range from 2.30% to 8.55%.
- Fundamental Metrics: Unfortunately, Phillips 66 comes with a higher-than-average forward P/E ratio at over 42, but many investors and analysts attribute this to a lack of profits in recent quarters due to the COVID-19 crisis. Moving forward, strong growth in earnings is expected to taper this figure down. The stock looks far better from a P/S ratio standpoint, with the figure coming in at just 0.39, suggesting that the stock is significantly undervalued.
- Recent Financial Results: Unfortunately, Phillips 66 missed both earnings and revenue expectations in the most recent earnings report, but this is yet another company that many believe the bar was set far too high for. Year over year, its revenues and earnings were up more than 274% and 184%, respectively.
- Analyst Opinions: While the most recent earnings report missed expectations, analysts still seem to be in love with the stock. Out of 17 analysts covering it, 14 rate it a Buy and three rate it a Hold. The average target price on the stock is $213.94 per share, suggesting that there’s potential for more than 40% gains from its current price.
Phillips 66 is a relatively new company compared to others on this list, but its lineage goes back farther than most investors give it credit for. The company was the result of ConocoPhillips spinning off its downstream and midstream assets in 2012.
While ConocoPhillips is the legacy company that handles the exploration and production side, Phillips 66 is the spun-off company charged with managing the midstream and downstream assets, such as the pipelines and other infrastructure that allows for the safe transportation of crude oil and the refineries that turn it into gasoline, diesel fuel, and other finished products.
Although the assets were part of a spinoff, the core of the business Phillips 66 does can be traced back to the original parent company’s founding in 1875.
If you’re planning on making investments in oil, chances are you’re on the right track. Not only are these stocks known for paying compelling dividends, recent drawdowns in the industry set the stage for a strong recovery.
Nonetheless, as is always the case when investing, it’s important to do your research before buying any oil stock. After all, not all stocks in any category will perform equally well.
Disclaimer: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.