Energy Stocks Have Soared This Year, but, These 3 Still Look Like Great Buys

The stock market has been roaring this year. Most sectors have rallied, including energy. The average energy stock in the S&P 500 is up more than 10% this year.

Despite that rally, several energy stocks still look like compelling buys. Chevron (CVX -0.23%), MPLX (MPLX 1.34%), and Occidental Petroleum (OXY -1.38%) stand out to a few Fool.com contributors as great buys right now. Here’s why they think these energy stocks could supply investors with high-octane total returns from here.

Chevron comes with baggage

Reuben Gregg Brewer (Chevron): When it comes to integrated energy majors, Chevron is easily one of the elite group leading the pack. It is large, with a market cap of $275 billion. It is diversified across the upstream (production), midstream (pipelines), and downstream (chemicals and refining). It is financially strong, with a debt-to-equity ratio of only around 0.17 times (one of the lowest of its closest peer group). And it has an over three-decade history of annual dividend increases.

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And yet, it has lagged behind the energy rally over the past year and is well behind ExxonMobil, its closest U.S. comparison point. The problem is a bit unique since Chevron is in the middle of trying to buy Hess, and Exxon appears to be standing in the way. Exxon’s partnership with Hess in a major oil project is what’s holding things up and could even scuttle the deal. Investors are likely treading carefully with Chevron right now, worried that the deal falling through would result in slower growth for Chevron. That’s not unrealistic.

But Chevron isn’t a stock you look at for the short term but one you buy for the long term. Even if Exxon throws a wrench in the Hess deal, Chevron can simply shift gears and find another acquisition target. Maybe that takes a little time, but losing Hess won’t derail Chevron; it will just slow it down temporarily. Thus, the laggard stock performance today could end up being a buying opportunity. And you’ll get an attractive 4.2% dividend yield while you wait for all this to get sorted out.

The complete package

Matt DiLallo (MPLX): Units of MPLX have gained about 25% so far this year. Even with that surge, the master limited partnership (MLP) still looks like an attractive investment.

Despite the MLP’s roaring rally this year, it still offers a high yield of more than 8%. That’s due to a combination of valuation (which is still relatively low at about 10 times earnings) and continued distribution growth. MPLX recently increased its distribution by another 12.5%, marking its third straight year of double-digit distribution increases.

MPLX is in an excellent position to continue increasing its distribution at a healthy rate. It produces lots of stable cash and has a conservative payout ratio. It generated roughly enough cash through the first nine months of this year to cover its distribution, capital spending, and a couple of acquisitions. And it has a cash-rich balance sheet with a low 3.4 times leverage ratio (well below the 4.0 times its stable cash flows could support).

The MLP is investing to continue expanding its midstream footprint, which is growing its capacity and cash flow. The company has several projects underway, giving it visibility into its growth through 2026.

MPLX is the complete package for investors. It offers an attractive combination of income and growth at a reasonable valuation. Because of that, it still looks like a great buy right now for those comfortable with investing in an MLP, which sends investors a Schedule K-1 federal tax form each year.

Occidental’s acquisition is paying off

Neha Chamaria (Occidental Petroleum): Shares of Occidental Petroleum have been a big laggard this year, trading 15% lower in 2024 as of this writing. Investors may have been worried about the impact of the recent fall in oil prices on a company saddled with debt, but they’re perhaps overlooking Occidental Petroleum’s latest move. The oil and gas giant is doing what it should — boosting cash flows and repaying debt, making Occidental stock the kind you’d want to buy while the opportunity lasts.

Occidental just reported strong profits for its third quarter despite a drop in commodity prices, thanks in part to higher production driven by a recent acquisition. Occidental acquired CrownRock in August for roughly $12 billion, including debt, and expected the acquisition to be immediately accretive to its cash flows. In Q3, Occidental delivered its highest operating cash flow so far this year.

More importantly, Occidental committed to divesting assets and repaying debt worth around $4.5 billion within a year of acquiring CrownRock. The company is off to a great start, repaying debt worth $4 billion in the third quarter alone, within just two months of closing the acquisition.

Thanks to CrownRock, Occidental raised its full-year production guidance for the Permian Basin, so I expect the company to continue to generate strong cash flows and pare down debt. A strong balance sheet is perhaps the biggest forte for a commodity stock, and Occidental is slowly but surely getting there.