Three Solid Energy Picks for the Next Leg Up

June has been a rough month for energy stocks. Earlier this week, the group nearly dipped into bear market territory, 19.5% below its June 8th high. Still, energy is the only sector in the green year to date. So far this year, the energy sector has stacked on nearly 37%. The distant runner-up is Utilities, with a 3% loss.  

Many on Wall Street expect sky-high oil prices to continue to boost returns for some of the top names in energy. Matt Smith, a lead oil analyst for the Americas at Kpler, an analytics company, recently told CNN Business that “triple-digit oil prices” are likely to stick around. “If Chinese demand comes roaring back after lockdowns and Russia continues to see production drop, then a retest of the high of $139 seen earlier in the year is not beyond the realms of possibility,” he said.

For anyone expecting oil prices to continue climbing in the back half of the year, it’s hard not to see the recent drop in energy stocks as an attractive opportunity.   In this watchlist, our team looks at three energy stocks that seem primed to outperform in the next leg up.  



Texas-based independent energy firm Diamondback Energy (FANG) is living up to its reputation for rewarding investors, and many on Wall Street are awaiting the next move. 

The company recently announced enhancements to its capital return framework as a testament to its commitment to delivering significant value to shareholders. This will be the next iteration of a shareholder returns program that began with the initiation of its base dividend in 2018, which has increased 500% since.  

Diamondback will increase its base dividend to $3.00 per common share annually ($0.75 per quarter) beginning with the second quarter of 2022, a 7.1% increase from the company’s previous annual base dividend of $2.80 per share. Starting in the third quarter, the company’s Board of Directors has approved an increase to its return of capital commitment to at least 75% of Free Cash Flow, from its previous commitment of at least 50% of Free Cash Flow.

Diamondback has also repurchased 1,966,516 shares of its common stock for about $253 million during the second quarter at around $128.42 per share. The company expects that the combination of these stock repurchases and its expected base-plus-variable dividends for the quarter will constitute a return of capital to stockholders well above 50% of Diamondback’s Free Cash Flow for the second quarter.

Diamondback’s high cash margins and low-cost structure will likely continue to drive an increasing return on capital. At the same time, its strong balance sheet should be able to withstand another downcycle, making this an ideal name to add to your watchlist.  



When it comes to energy, Canada stands out with its expansion of fossil-fuel production. Oil giant Canadian Natural Resources LTD (CNQ) has the largest undeveloped base in the Western Canadian Sedimentary Basin, is the largest independent producer of natural gas in Western Canada, and the largest producer of heavy crude oil in Canada.  

Higher oil and gas prices have substantially improved energy companies’ earnings recently. CNQ has utilized this excess cash to return to shareholders and improve its balance sheet. The company lowered its debt from around $35 billion in 2021 to $18 billion at the end of Q3 2021. Canadian Natural could see more upside if energy commodities continue to trade strongly. 

Considering the potential tailwinds for the industry and CNQ itself, it would make sense for the massive oil company’s stock to trade at a premium price. Potential investors will be glad to know that the stock has a forward P/E ratio of 7.06, better than the industry average of 8.  

The pros on Wall Street agree that CNQ shares are ripe for the picking. Of 21 analysts offering recommendations, 12 rate the stock a Buy, and 9 give it a Hold rating. There are no Sell recommendations. CNQ also boasts an attractive 4.26% dividend yield.  

The company will release Q4 earnings in early August. Management’s commentary and the quarterly performance will be critical factors that could influence the stock.  

Chevron Corp (CVX) is one of the world’s largest publicly traded oil and gas companies, with operations that span nearly every corner of the globe. The only energy component of the Dow Jones Industrial Average, Chevron is fully integrated, meaning it participates in every aspect related to energy, from oil production to refining and marketing. 

The majority of the company’s organic growth is expected to come from the Permian basin through year-end 2023, with volumes potentially growing to over 1 million barrels of oil equivalent per day by 2025. 

Chevron topped consensus revenue estimates each of the last four quarters and topped EPS estimates twice over the past two quarters. Last quarter, the company reported $54.37 billion in revenue, representing a year-over-year change of +69.8%. EPS of $3.36 for the same period compares with $0.90 a year ago.

As a bellwether for oil stocks, Chevron investors will be looking for strong downstream margins when the company reports Q2 earnings on July 28th. The consensus revenue estimate of $54.33 billion points to a year-over-year change of +44.5%. 

Over the past year, Chevron shareholders have received a total return of 41%, including the dividend. It might be worth taking a closer look now that the stock is 19% below its ATH set just three weeks ago.

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