The price of oil has risen sharply over the last year and this has pushed many oil stocks up significantly. Just look at the share price of oil major Shell (LSE: SHEL). Over the last 12 months, it has climbed nearly 40%.
Looking at what’s going on in the energy market today, I think there could potentially be further upside for oil stocks. Right now, the oil market is capitalising on rising demand, low global inventories, underinvestment in drilling rigs (due to the shift towards renewable energy), and high levels of geopolitical tension. This combination could push oil prices as high as $150, according to some analysts.
Here, I’m going to highlight some oil stocks listed on the London Stock Exchange. If I was looking to capitalise on higher oil prices by investing in stocks, these are some of the shares I’d consider for my own portfolio.
Oil giants
Let’s start with Shell (formerly Royal Dutch Shell). It’s the largest oil stock in the UK with a market-cap of around £150bn, and one of the industry’s ‘supermajors’.
Shell’s recent Q4 2021 results showed the company is doing well right now. For Q4, adjusted earnings came in at $6.4bn, up from $4.1bn in Q3. Meanwhile, adjusted earnings for 2021 amounted to $19.3bn versus $4.8bn a year earlier. On the back of these strong results, Shell raised its dividend by 4%. It also announced a share buyback programme of $8.5bn for the first half of 2022.
Shell currently trades on a forward-looking P/E ratio of about eight and sports a dividend yield of around 3.7%, so it appears to offer value right now. However, a risk to be aware of here is that many institutional investors are dumping oil stocks in an effort to focus on sustainable investments. This could put pressure on the share price in the long run.
Also in the large-cap space, there’s BP (LSE: BP). It’s another global oil giant with a huge market-cap (£76bn).
Now BP is in the process of transitioning to a renewable energy company. In 2020, it announced a major transformation programme in an effort to be a net zero business by 2050. However, today, BP is still very much an oil company and this means it can benefit from higher oil prices.
Like Shell, BP has seen a massive increase in its profits recently. For 2021, it generated a profit of $7.6bn versus a loss of $20.3bn in 2020. Meanwhile, operating cash flow jumped from $12.2bn in 2020 to $23.6bn in 2021.
“The company is a cash machine at these sorts of (oil and gas) prices and the business is running very well,” CEO Bernard Looney said last year.
At present, BP trades on a P/E ratio of around seven, with a yield of about 4.2%. This indicates the stock is cheap. However, the company’s transition to renewable energy adds risk to the investment case. This is going to cost the group a lot of money and there could be setbacks along the way.
A mid-cap oil stock
In the mid-cap area of the market, one company that looks interesting to me is Diversified Energy (LSE: DEC). Formerly Diversified Gas & Oil, it’s an established, independent owner and operator of producing natural gas and oil wells in the US. Its goal is to acquire and manage mature natural gas and oil properties to generate cash flows and growth for the long-term benefit of its stakeholders.
Analysts expect Diversified Energy to post a large increase in revenues and profits for 2021. Revenue for the year is expected to come in at $960m, up from $409m in 2021. Meanwhile, net profit is expected to amount to $195, versus a loss of $23.5m in 2020.
In a recent trading update, management was very confident in relation to the outlook. “As I survey our prospects, our outlook is as dynamic as I’ve seen,” CEO Rusty Hutson Jr said. “We enter 2022 with great momentum,” he added.
DEC shares currently trade on a forward-looking P/E ratio of about six so the stock is not expensive. It’s worth pointing out that the company has recently been embroiled in a row over the impact of its gas wells on the environment. This is an issue to keep an eye on.
Small-cap oil stocks
Turning to the small-cap space, one stock that’s worth highlighting right now is Gulf Keystone Petroleum (LSE: GKP), which has a market-cap of £443m. It’s an independent oil company that operates in the Kurdistan region of Iraq. Its main asset is the Shaikan Field – a giant oil field covering an area of 280 square kilometres.
GKP experienced a significant drop in revenues and profits when oil prices crashed during Covid-19. However, it’s now seeing a big rebound. For 2021, analysts expect revenue and net profit to come in at $315m and $155m respectively. That compares to $108m and -$47.3m in 2020.
Another small-cap oil stock worth highlighting is Jadestone Energy (LSE: JSE). It’s an under-the-radar oil and gas development and production company that has assets in Asia and Australia. It currently has a market-cap of around £420m.
A recent trading update from Jadestone was very encouraging. Not only did the group say it expects 2022 production to average 15,500 to 18,500 boe/d, a 30%+ increase on 2021 (with the majority being oil), but it also said that it may increase capital returns to investors.
“Based on our spending forecasts, we expect to generate material incremental cash in 2022 at current oil prices and premiums, and as a result, an increase in shareholder returns, either through increased dividends and/or share buy-backs, may be considered later in the year,” president and CEO Paul Blakely said.
While both of these stocks look cheap right now, it’s worth pointing out that small-cap oil stocks such as GKP and Jadestone tend to be high-risk investments. If oil prices fall significantly, these kinds of stocks can crash. Small oil producers also tend to have high levels of operational risk too. GKP, for example, has had some issues collecting recent payments. So these stocks are more speculative in nature.
