Three Equity Distributions Decreasing by 11% to 16% for Purchase Consideration in February
The S&P 500 (^GSPC -1.71%) has soared 22.8% over the past year, propelled by megacap growth and value stocks. As valuations in top companies reach their limits, some investors might be seeking undervalued companies to invest in. The energy sector, in particular, boasts a plethora of income-generating, underpriced stocks, especially in the upstream segment. Here are three reasons our contributors think Occidental Petroleum (OXY -3.21%), Diamondback Energy (FANG -3.68%), and Devon Energy (DVN -2.75%) are worthy buys at the moment.
A daring bet in the oil patch
Daniel Foelber sheds light on why Occidental Petroleum (Oxy) could be an attractive buy, despite the stock's loss of over 15% in the previous year. The company reported a net loss of $297 million in Q4, but solid cash flow kept investors hopeful. Oxy successfully repaid its debt target and announced a $1.2 billion divestiture for the first quarter of 2025. The CrownRock acquisition, completed in 2024, bolstered the company's production and cash-flow potential but increased its leverage. The conservative $1 billion annual free cash flow forecast from CrownRock, assuming $70 a barrel for WTI, seems reasonable, given the current oil price. However, its exposure to lower oil prices warrants consideration. Oxy can make for a decent income source, with a 1.9% yield from its recently boosted quarterly dividend.
The perfect time to scoop up this oil and gas company
Lee Samaha shares his viewpoint on Diamondback Energy as a value-priced opportunity. While Diamondback stock has dropped 10.7% within the past year, its performance has held steady when considering average oil prices. With a break-even point of $37 a barrel for its base dividend, the stock is less vulnerable to price drops than one might think. Analysts anticipate strong cash flows in 2025, which could lead to record-breaking returns to investors via dividends and share buybacks. Exemplifying its flexible capital strategy, Diamondback adjusts its variable dividend and share buybacks to respond to market conditions.
February whispers love for Devon Energy
Scott Levine discusses why Devon Energy is another compelling option for income-focused investors. While the energy sector has boomed in the past year, leading to a challenging market for income stocks, Devon Energy has remained a stable player. Although the company's share price plummeted due to lower energy prices, it did not suffer any major setbacks. The $500 undrilled gross locations in its newly acquired Williston Basin and the company's conservative approach to leverage should reassure potential investors. In fact, Devon Energy is offering a 4.2% forward dividend yield at a 3.3x operating cash flow multiple.
Our contributors argue that in these out-of-favor energy stocks, investors may find opportunities to reinvest their capital and reap dividend yields.
- Despite a net loss in Q4 and a decrease in its stock price, Occidental Petroleum's solid cash flow and successful debt repayment make it an attractive income source, with a boosted quarterly dividend yield of 1.9%.
- Diamondback Energy, whose stock has dropped by 10.7% in the past year, is considered a value-priced opportunity due to its strong cash flows and a break-even point of $37 a barrel for its dividend, making it less vulnerable to oil price drops.
- Devon Energy, despite lower energy prices and a challenging market for income stocks, has remained a stable player, offering a 4.2% forward dividend yield at a 3.3x operating cash flow multiple, making it an appealing option for income-focused investors.
- As valuations in top companies reach their limits, some investors might find undervalued opportunities in the energy sector, especially in stocks like Occidental Petroleum, Diamondback Energy, and Devon Energy, which offer significant income-generating potential.
