Want to Improve Your Stock Selection Success Rate in U.S. Oil Stocks? Remember These 6 Rules

Stock Selection Success Rate in U.S. Oil Stocks
Published on: Apr 15, 2024

In recent times, due to the escalating situation in the Middle East leading to a surge in oil prices, oil stocks in the U.S. stock market have heated up again. Marathon Petroleum Corp (NYSE: MPC) has seen a 43% rise in its stock price this year, Exxon Mobil (NYSE: XOM) has surged by 22%, Occidental Petroleum (NYSE: OXY) by 16%, and Halliburton (NYSE: HAL) by 13%.

Energy sector of the S&P 500 index has risen approximately 17% this year, trailing only the communication services sector. Meanwhile, the energy sector boasts a Price/Earnings ratio of around 13 based on the next 12-month expected earnings, lower than the index’s 21, making it attractively valued.

However, all investors face a common challenge: stock selection. Even if the industry is chosen correctly, selecting the wrong stocks could lead to unsuccessful outcomes. If you aim to enhance your success rate in selecting oil stocks, the following criteria are worth considering:

  1. Forward dividend yield exceeding 3%: Generous dividends can ensure a profitable investment base, especially for some aggressive oil exploration stocks where investment success hinges greatly on stock price appreciation.
  2. Free cash flow not less than $1 billion: Adequate free cash flow, which is the remaining amount after deducting expenses, signifies a strong financial foundation for reinvestment or shareholder returns.
  3. Price to cash flow ratio below 5: Lower valuation in terms of the ratio of market value to cash flow typically indicates a more reasonable valuation, preventing investors from overpaying. In the energy sector, a price to cash flow ratio below 5 is below the average level.
  4. Forward Price/Earnings ratio below 10: This valuation metric based on future earnings is gaining more prominence. The average Price/Earnings ratio for S&P 500 index energy stocks is currently around 10.
  5. Market capitalization not less than $9 billion: This criterion aims to ensure the company’s size and maturity, making it more resilient to short-term fluctuations in energy prices.
  6. U.S. listed stocks: Whether U.S. or multinational companies, all securities must be listed on U.S. exchanges and preferably located in developed markets like Europe and Canada, mitigating the risks associated with emerging market energy stocks.

Below are the 9 U.S. oil stocks selected based on the above criteria:

Company Market Cap Dividend Yield Price/Earnings Ratio
Shell (SHEL) $216 billion 4.1% 11.9
BP (BP) $106 billion 4.5% 7.4
Equinor (EQNR) $79 billion 4.6% 6.9
Valero Energy (VLO) $57 billion 2.5% 6.9
Eni (E) $51 billion 6.3% 10.5
Suncor Energy (SU) $48 billion 4.3% 8.0
Diamondback Energy (FANG) $36 billion 4.1% 11.5
Coterra Energy (CTRA) $21 billion 3.0% 13.2
HF Sinclair (DINO) $12 billion 3.1% 7.3

Dividend Yielding Stocks Oil & Gas US Stocks Value Stocks