The recent attack on Iran has led to a spike in oil prices and brought to light the importance of including oil stocks in a diversified investment strategy. Interestingly, while oil stocks have experienced a recent uptick, they’ve still somewhat fallen out of favor in recent times. Two stocks, Devon Energy and Diamondback Energy, remain appealing options for investors looking to tap into North American oil production. Let’s explore why.
At the start of the year, oil prices hovered around $57 per barrel. However, they have surged close to $88 recently. It’s worth noting, though, that the ongoing conflict in Iran makes it hard to forecast the future of oil prices or how production and transport will be affected.
Considering the potential for a prolonged period of high prices, it’s certainly wise to hedge your investments. Particularly if the stocks you’re eyeing still hold value, even if oil drops back down to the $50 range. Both Devon and Diamondback have adapted their strategies, preparing for the price declines that began in late 2023. This means they can effectively manage operations even with oil prices as low as $50, adding a layer of financial safety for investors.
Interestingly, both companies focus on low-cost production within the U.S., which has made some investors wary about oil-producing regions more impacted by Middle Eastern tensions. The downside, though, is that such an approach keeps break-even prices relatively low—something that could either be a strength or a challenge, depending on market dynamics.
Diamondback’s strategy, for instance, involves concentrating on the Permian Basin and being strategic with capital to boost essential improvements like drilling rig efficiency while avoiding unnecessary acquisitions.
This conservatism enables Diamondback to generate a solid cash flow, supporting a base dividend of $4.20 per share and currently offering a yield of 2.2%. They also employ strategic hedging to safeguard against drops in oil prices, which allows ongoing production. Management feels confident that their hedging strategy leaves room for growth above the $50 mark.
On the flip side, Devon’s forthcoming merger with Coterra Energy, which was announced in early February, stands to create substantial synergies in the Delaware Basin. This merger will significantly expand Devon’s footprint, adding 346,000 acres, nearly doubling its total in that area, which now boasts a breakeven price below $40 per barrel. The combined entity will likely maintain the majority of its resources at breakeven prices below $50.
Moreover, both stocks are trading at impressively low multiples of price-to-free cash flow. As a result, the combination of solid valuations, low break-even costs, and potential growth from favorable price movements makes these two stocks solid picks for those looking to gain exposure in the energy sector.
But before diving into an investment in Devon Energy, it’s crucial to keep in mind various considerations that might influence your decision.
Research from the Motley Fool Stock Advisor highlights stocks that it believes present promising investment opportunities, albeit Devon Energy isn’t among those listed right now. In fact, the publication identified ten stocks that have the potential for significant returns in the coming years.
It’s essential to also reflect on past performances and market dynamics when evaluating future investments. The Motley Fool reports strong overall returns from the Stock Advisor program, significantly outpacing S&P 500 averages, which could be something to consider for strategy development.
