A glance at the S&P 500 stocks that are out of the gates fast this year reveals some unfamiliar names. Six of the top 10 are members of an energy sector that suffered a historic plunge in 2020.
While plenty of uncertainty remains around a sustainable rebound in demand, investors seem to be positioning their portfolios for an epic energy comeback. They are hoping that vaccine progress spurs a healthier global economic environment this year and leads to big gains for the beaten down energy group.
Is this a case of investors desperate for yield and value in a low-rate market that has pockets of overvaluation? Or does it signal that this is a good time to get in before energy stocks rally higher in 2021?
Here we take a look at three oil drilling stocks that have notched 20%-plus returns already this year—and may have just scratched the surface.
Why is Occidental Petroleum Stock Doing So Well?
Occidental Petroleum (NYSE:OXY) has stormed higher by 29% making it the top performing stock in the S&P 500 after the year's first two trading weeks. With operations in the U.S., Latin America, and the Middle East, the oil and gas producer in among the best positioned global energy players to benefit from a market turnaround.
With Occidental's buyout of Anadarko Petroleum complete, the company now boasts some of the highest crude oil and natural gas volumes in the industry. With prices of both commodities moving higher since late last year the market seems to be betting that the worst is over for the sector—and a lot of the chips are going to Occidental.
In addition to the benefit of higher oil and gas pricing, Occidental is expected to get a boost from cost synergies related to the ongoing integration of Anadarko. On top of $1.2 billion in 2020 overhead and operating expense reductions, management forecasts another $1.1 billion in cost savings to be derived from the Anadarko acquisition.
The technical analysis looks promising. Occidental's chart shows that the 50-day moving average (MA) price line has crossed the 200-day moving average price line. This commonly followed "life cross" event suggests that a bullish long-term trend may lie ahead. The 50-day crossover move reversed a more than two-year-old history of the 200-day line hovering above its shorter-term counterpart.
How are Devon Energy's Financials?
Devon Energy (NYSE:DVN) is another energy stock that has sprinted to the front of the S&P 500 pack, up 24% year-to-date. As more of a North American energy play, Devon stands out from its peer group on account of its high-quality assets and overall strong balance sheet.
Devon Energy has an increasing $1.9 billion cash position and no debt coming due until the end of 2025. Over time as oil and gas prices recover to pre-pandemic levels, Devon will be operating from a position of strength and likely deliver one of the best financial performances of the sector.
The company's flexible dividend policy has evolved with the times. It has both fixed and variable components to the dividend payout which enables it to adjust to current market conditions. So, investors can fret less on the sustainability of the dividend and expect a prudent dividend policy to drive solid capital returns. A new $1 billion buyback program also bodes well for shareholders.
Devon Energy is one of the most favored energy stocks on the Street. Of the last 15 analysts to offer an opinion, all but one have given it a buy rating. Most price targets are in the $20 to $26 range. As analysts play catch up with the improving industry fundamentals of lower supply and higher demand, we are likely to see price targets bumped higher.
From a technical perspective, the stock had a huge volume spike on January 6th, 2021. This came on the heels of Devon's recently completed merger with WPX Energy. Nearly 90 million shares traded hands that day, eight times the stock's 90-day average volume. This was the highest volume spike since February 2016 and suggests there could be many more green days ahead for Devon.
What is Diamondback Energy's Competitive Advantage?
Diamondback Energy (NASDAQ:FANG) is an oil and gas exploration and production company with heavy exposure to the Permian Basin. This is the sprawling oil rich land mass located in western Texas and New Mexico. The shale in this region is known to be a less expensive place to drill and complete oil well projects compared to other major oil fields. Herein lies Diamondback's competitive advantage.
The Permian accounts for roughly one-third of all U.S. oil production and it is here that Diamondback owns over 7,000 drilling sites across nearly 400,000 acres. The company's recent $2.2 billion acquisition of QEP Resources is expected to increase this footprint by more than 10%.
As a smaller player in the energy market, Diamondback may be able to produce more robust growth as the oil market recovers compared to the oil majors. According to analysts, revenue and earnings are forecast to rebound 44% and 55%, respectively, this year.
Since its sharp March 2020 plunge, the stock is recording higher lows and higher highs, a sign that we've likely seen the bottom. And after a 22% jump to start the year, this stock still has some bite to it. Diamondback shares trade at 12.5x forward earnings and come with a 2.5% dividend yield.
Not to be confused with the popular technology cohorts, 'FANG's' expanding Permian presence makes it an attractive energy play that investors should sink their teeth into.
Before you consider Occidental Petroleum, you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Occidental Petroleum wasn't on the list.
While Occidental Petroleum currently has a "Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.
View The 5 Stocks Here
Companies Mentioned in This Article
Compare These Stocks
Add These Stocks to My Watchlist