The attacks on Iran have driven oil prices higher and reminded investors that oil stocks are part of a diversified portfolio. The good news is the sector has definitely fallen out of favor in recent years, and despite the recent rise in oil stocks like Devon Energy (DVN +0.71%) and Diamondback Energy (FANG +3.24%), they remain excellent value stocks that investors can buy to gain exposure to North American oil production. Here’s why.
Good value stocks, whether oil is $80 or $50
Having started the year around $57 a barrel, oil prices have spiked to closer to $88 at the time of this writing. That said, it’s incredibly difficult to predict the outcome of the Iran conflict, the implications for oil production and transportation, and, ultimately, where oil prices are headed next.
Image source: Getty Images.
But protecting against the possibility of an extended period of high prices makes sense, and it makes even more sense if the stocks are attractive even if oil prices drop back to a $50 handle. The key point is that both companies have adjusted their strategies in light of the downtrend in oil prices that began in fall 2023 and are structured to do well at $50 oil, so anything above that can be seen as a bonus.
Both oil companies are focused on producing at relatively low cost in the U.S., so investors are assured they are not investing in oil-producing regions directly exposed to the Middle East conflict. That said, the issue with domestic producers often comes down to ensuring the corporate break-even price (the oil price required to generate cash flow to fund oil production) is low.
Diamondback Energy
Today’s Change
(3.24%) $5.74
Current Price
$182.75
Key Data Points
Market Cap
$51B
Day’s Range
$174.90 – $183.41
52wk Range
$114.00 – $186.66
Volume
179K
Avg Vol
2.6M
Gross Margin
35.16%
Dividend Yield
2.22%
1. Diamondback Energy
For Diamondback, that means focusing on the Permian Basin, being disciplined with capital allocation, and generating operational improvements, such as increasing the productivity of its drilling rigs and developing assets in secondary zones rather than pursuing acquisitions.
That disciplined approach means Diamondback can generate the cash flows to support its base dividend of $4.20 a share (currently yielding 2.2%). Diamondback also uses opportunistic hedging to protect downside exposure to the price of oil and, in doing so, ensure it can continue production. Consequently, management believes its current hedges give it upside exposure to oil prices above $50 a barrel.
Devon Energy
Today’s Change
(0.71%) $0.33
Current Price
$46.27
Key Data Points
Market Cap
$29B
Day’s Range
$45.41 – $46.40
52wk Range
$25.89 – $46.41
Volume
450K
Avg Vol
11M
Gross Margin
23.24%
Dividend Yield
2.59%
2. Devon Energy
Just as Diamondback previously used acquisitions to build scale and generate cost synergies by focusing on developing assets in the Permian, Devon’s impending merger with Coterra Energy (announced in early February) will also create significant synergy opportunities in the Delaware Basin (Permian).
Adding Coterra will nearly double Devon’s acreage in the Delaware Basin by adding 346,000 acres to its 400,000 acres, resulting in the combined company having the largest share of Delaware Basin inventory with a break-even price of less than $40 a barrel. In addition, the new Devon Energy will have the overwhelming majority of its inventory with a break-even price of less than $50 a barrel.
Stocks to buy
Both stocks trade on extremely low price-to-free cash flow multiples.
FANG Price to Free Cash Flow data by YCharts
As such, the combination of good valuations, low break-even prices, and upside potential from a protracted period of relatively high prices makes these two stocks compelling buys for investors looking for energy exposure.