Earlier this month, analysts at Bank of America (BofA) predicted that both Brent and West Texas Intermediate (WTI) crude oil prices could hit $95 a barrel this summer. While that likely wouldn't be good for your wallet due to higher prices at the pump, it could be good for your investment portfolio.
Overall, the investment bank raised its full-year average price prediction for Brent to $86 a barrel from a prior forecast of $80 a barrel. Meanwhile, it took its 2024 average WTI forecast from $75 a barrel to $81 a barrel.
BofA raised its oil price forecast for several reasons, including increased geopolitical tensions between Western nations and the oil-producing countries of Russia, Iran, and Venezuela. The bank also sees oil demand outstripping supply due to OPEC+ production cuts, slowing shale growth in the U.S., and a better global economic outlook.
So how can investors play higher oil prices? Let's look at three stocks set to benefit -- from an oil major to a small independent producer.
ExxonMobil
ExxonMobil(NYSE: XOM) may be one of the largest energy companies on the planet, but it has solid growth prospects ahead of it. Its two biggest areas of growth are coming from Guyana and the Permian Basin, which combined saw 18% production growth in 2023.
Its prized possession is its 45% stake in the Stabroek block, which is an offshore oil project off the coast of South American country Guyana that it operates. The asset is prolific, with an estimated 11 billion or more barrels of reserves, and it has very low breakevens of an estimated $28 a barrel. Exxon just announced that it will move forward with a new Stabroek project off of Guyana that will add capacity of 250,000 barrels of oil per day.
The company is also ramping up production in the Permian Basin, where it is looking to grow its production by about 13% a year over the next few years. It expects to reach 1 million barrels of production from the Basin by the end of 2027. Overall, it is looking for production to rise from 3.8 million oil-equivalent barrels per day in 2023 to about 4.2 million oil-equivalent barrels per day by 2027.
ExxonMobil is methodically growing production, and with oil prices possibility set to rise, it is in a strong position to benefit.
Occidental Petroleum
Occidental Petroleum(NYSE: OXY)is an international oil company with a strong presence in the Permian Basin. Once its $12 billion acquisition of CrownRock is complete, nearly 48% of its production will come from the Basin.
However, despite adding to its Permian assets with its pending acquisition of CrownRock, the company is looking for relatively flat growth from the Basin this year, instead looking for production growth mostly to come from the Rockies and Al Hosn in the UAE.
The biggest benefit of higher oil prices for Occidental, though, is that it will help the company deleverage its balance sheet more quickly. The company will have about $28.5 billion in debt after the CrownRock deal closes.
In 2023, the company generated $5.5 billion in free cash flow. But for every $1 a barrel change in the price of WTI, Occidental sees about a $210 million increase in annual cash flow. It also sees a $20 million increase in annual cash flows from a $1 per barrel move in Brent crude prices. If oil prices average over $10 a barrel more in 2024 compared to 2023, it could see a $2.3 billion increase in free cash flow. CrownRock was also expected to add $1 billion in annual cash flow at $70 a barrel WTI. So Occidental should be able to pay down its debt pretty quickly if oil prices remain elevated.
Baytex
Similar to Occidental, Baytex(NYSE: BTE) is another deleveraging story that will greatly benefit from higher oil prices. Following its acquisition of Ranger Oil, the company is also looking to reduce its net debt, which stood at $2.5 billion Canadian dollars ($1.9 billion) at the end of 2023.
Baytex forecast free cash flow of CA$530 million ($388 million) for 2024, but that was based on a WTI price of $73 a barrel. At BofA's forecast of $81 a barrel, the company would generate approximately CA$875 ($635 million) in free cash flow based on the oil-price sensitivities that the company provided. That's a whopping 65% improvement compared to guidance and will allow Baytex to more quickly reduce its debt and also buy back stock.
The company is set to grow production this year by 1% to 2%, and it should also benefit from a narrowing of the differential of Canadian heavy oil compared to WTI, as well.
Image source: Getty Images.
Three stocks to buy
All three oil stocks are set to benefit from high oil prices. ExxonMobil is an industry leader with solid growth and low-cost production. Occidental and Baytex, meanwhile, both have deleveraging opportunities they can accelerate with higher oil prices. While the smallest of the bunch, Baytex is particularly sensitive to oil price movements and could have the most upside in an oil bull market. However, it does carry more risk if oil prices fall as well.
Should you invest $1,000 in Occidental Petroleum right now?
Before you buy stock in Occidental Petroleum, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Occidental Petroleum wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of April 15, 2024
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool recommends Baytex Energy and Occidental Petroleum. The Motley Fool has a disclosure policy.
