Earlier this month, Bank of America (BofA) analysts predicted that Brent and West Texas Intermediate (WTI) crude oil prices could reach $95 per barrel this summer. While this probably wouldn’t be good for your portfolio 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 forecast for Brent to $86 per barrel, up from a previous forecast of $80 per barrel. At the same time, it raised its average WTI forecast for 2024 from $75 per barrel to $81 per barrel.
BofA raised its oil price forecast for several reasons, including increased geopolitical tensions between Western countries and oil-producing countries Russia, Iran and Venezuela. The bank also believes that oil demand is outpacing supply due to OPEC+ production cuts, slowing U.S. shale growth and a better global economic outlook.
So how can investors benefit from rising oil prices? Let’s look at three stocks that stand to benefit – from a major oil company 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 largest growth areas come from Guyana and the Permian Basin, which together saw production growth of 18% in 2023.
Its most valuable asset is its 45% stake in the Stabroek block, which is an offshore oil project off the coast of the South American country, Guyana, which it operates. The asset is prolific, with reserves estimated at 11 billion or more barrels, and its breakeven point is very low, estimated at $28 per barrel. Exxon just announced it is moving forward with a new Stabroek project off the coast 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 plans to increase production by about 13% annually over the next few years. The basin’s output is expected to reach 1 million barrels by the end of 2027. Overall, it hopes production will increase from 3.8 million barrels of oil equivalent per day in 2023 to around 4.2 million barrels of oil equivalent per day by 2027.
ExxonMobil is methodically increasing production, and with the possibility of higher oil prices, it is in a good position to benefit.
Western oil
Western oil (NYSE: OXY) is an international oil company with a strong presence in the Permian Basin. Once the $12 billion acquisition of CrownRock is finalized, nearly 48% of its production will come from the Basin.
However, despite adding its assets to the Permian with its pending acquisition of CrownRock, the company expects relatively flat growth in the basin this year, instead hoping for production growth coming primarily from the Rockies and Al Hosn in the United Arab Emirates.
The biggest benefit of rising oil prices for Occidental, however, 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 dollar change in the price of a barrel of WTI, Occidental sees its annual cash flow increase by about $210 million. It also forecasts a $20 million increase in annual cash flow following a $1 per barrel change in Brent crude prices. If oil prices averaged $10 per barrel higher in 2024 than in 2023, free cash flow could increase by $2.3 billion. CrownRock was also expected to add $1 billion in annual cash flow at $70 per barrel WTI. Occidental should therefore be able to repay its debt relatively quickly if oil prices remain high.
Baytex
Similar to Western, Baytex (NYSE:BTE) This is another story of deleveraging which will benefit greatly from rising oil prices. Following the Ranger Oil acquisition, the company is also looking to reduce its net debt, which stood at C$2.5 billion ($1.9 billion) at the end of 2023.
Baytex forecast free cash flow of C$530 million ($388 million) for 2024, but that was based on a WTI price of $73 per barrel. At BofA’s forecast of $81 per barrel, the company would generate approximately CA$875 ($635 million) in free cash flow based on company-provided oil price sensitivities. This represents a whopping 65% improvement over forecasts and will allow Baytex to more quickly reduce its debt and also buy back shares.
The company is expected to increase production this year by 1-2% and should also benefit from a narrowing spread between Canadian heavy oil and WTI.
Three stocks to buy
All three oil stocks stand 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 that they can accelerate with rising oil prices. Although it is the smallest of the group, Baytex is particularly sensitive to oil price movements and could have the greatest upside potential in a bull oil market. However, this carries more risk if oil prices also fall.
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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.
Bank of America has just predicted oil at $95. 3 Oil Stocks to Buy Now was originally published by The Motley Fool