Top 3 Cheapest Oil Stocks to Buy Now? (2020 Review)
Today we’ll look at a topic very much in the news, thanks to falling oil prices: the cheapest oil stocks in the stock market.
Oil stocks are a required holding in any long-term diversified portfolio. They, like a few other companies, are so intrinsic to the life of every human being in the world, that their repeat usage is as close to a sure thing as you can get in the market.
With oil prices having fallen recently, a number of oil stocks are getting sold off. This is a terrific time to pick up some of the cheapest oil stocks out there.
Along those lines, just about any of the world class, legacy oil explorer-producers will be a fine addition to your portfolio. There is no questionable choice here.
With this environment, I tend to go for the stock that has been hardest hit. If you believe, as I do, that a global oil provider is eventually going to recover from any downturn, then you want to own the oil stocks that have the longest climb back.
The Cheapest Oil Stocks For 2020
If you’re in a hurry, below are our picks for the lowest priced dividend stocks as of this writing.
- BP, plc: Bad times are way behind it, yet the stock hasn’t recovered.
- ExxonMobil: The top name in oil stocks and a true long-term winner
- Chevron: Well-positioned and a great balance sheet.
Keep reading and you’ll find out more about these inexpensive oil stocks and my thoughts on each.
What Are Oil Stocks?
There are many different kinds of oil stocks. They are generally divided into three categories: upstream, midstream, and downstream. Those names represent what part of the supply chain the particular company operates in.
The Upstream category is partially what I’m writing about today, because I like the long-term profitability of the sector more than the other two.
Upstream refers to exploration, drilling, and extraction of oil. That extraction may come from land or from the ocean. Companies in the sector are often known as “E&P” stocks, short for “exploration and production”.
Midstream refers to operations that link upstream to downstream companies. This generally means the transportation and storage of oil. These are stocks that provide things like pipelines, gathering systems, and all the logistics needed to push the oil through storage and transport systems.
Downstream operations are where the oil is refined and marketed. These companies take crude oil and turn them into usable products like gasoline.
How Do You Determine What Qualifies As The Cheapest Oil Stocks?
The cheapest oil stocks have at least two of these three characteristics:
- Lower EV-to-EBITDA ratios
- A dividend yield of at least 3%
- Low relative stock price
Lower EV-to-EBITDA ratios
Unlike most stocks, which I generally value using a P/E ratio, I use an EV-to-EBITDA ratio.
“EV” means enterprise value, which is defined as market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents.
EBITDA means earnings before interest, tax, depreciation and amortization – or just a fancy way to say “cash flow”.
The reason I use this ratio is because oil stocks have erratic revenue and earnings because they are both cyclical and subject to many different market forces.
One of the important factors in choosing the cheapest oil stocks is to find a stock whose EV-to-EBITDA ratio is lower relative to its peers.
Dividend yield of at least 3%
Because I like to buy the cheapest oil stocks in the market, rather than overvalued stocks, I must believe that the total return potential for these oil stocks is going to be higher than just buying a stock that is priced higher.
A cheaper oil stock means its Enterprise Value is lower than its peers. Thus, that stock has more room to grow its Enterprise Value. When I add in a nice dividend yield of at least 3%, I know I’m getting extra value for my investment along with any potential for an increase in stock price.
Low relative stock price
I have been watching and trading oil stocks for a very long time. As a result, I know when any given oil stock is trading at a lower price than it traditionally does in good times.
If I can grab shares of the least expensive oil stocks, both in terms of valuation and in terms of relative price, I know I’m getting a bargain.
This is one of these cases where having a lot of experience in the stock market allows me to price range identify buying opportunities based on a stock’s historic price range.
Here’s a video that provides some additional information on investing in oil stocks.
What is it?
BP operates Upstream, Midstream, and Downstream operations, and also has a sizable Russian presence in a Russian venture known as “Rosneft”. Upstream handles oil and natural gas exploration, field development, and production. Midstream handles transportation, storage, and processing, as well as export terminals, and does so for liquefied natural gas. Downstream refines, markets, and sells to both wholesale and retail customers.
The Rosneft division handles exploration as part of a Russian joint venture. It owns and operates 13 refineries in Russia, and even got into the service station business over there, operating some 3,000 stations.
What makes it a cheap stock?
You may have thought BP was toast after the Deepwater Horizon disaster. Not true. Oil prices are at a level – even this level – where BP makes money. In fact, a couple of years ago, BP said it could operate at breakeven if oil was $42. Right now, it’s at $51, and OPEC and Russia seem to have come to terms about limiting supply.
Meanwhile, BP’s revenues are on fire. They rose from $182.6 billion in 2016 to $238.8 billion last year, and a whopping $288 billion in the last twelve months. Bottom-line profit increased from a mere $114 million in 2016 to $3.38 billion last year, and $3.5 billion in the last twelve months.
Free cash flow was hard to come by for BP for many years, as it was constantly paying out fines and restitution for the disaster. But free cash flow went from negative $6 billion in 2016 to positive $3.3 billion last year to $6.6 billion in the past twelve months.
It pays a terrific dividend of 6.23%, and has a very low EV-to-EBITDA ratio of 5.22.
What is it?
ExxonMobil is the famous, global provider of Upstream, Downstream, and Chemical products. The company manufactures petroleum products, commodity petrochemicals, olefins, aromatics, plastics, and produces transportation fuels. Of course it also transports and sells crude oil, natural gas, and petroleum.
It is, to me, the single greatest name in the world of cheapest oil stocks, and probably always will be.
What makes it a cheap stock?
ExxonMobil is one the cheapest oil stocks out there right now, and not for any good reason. That’s why it’s a value play and a great addition to your long-term portfolio.
For starters, its EV-To-EBITDA ratio is one of the lowest its been at in years, at 9.3. ExxonMobil’s ratio is usually well above 10, or even higher.
The stock is also offering a generous 4.22% yield, a dividend payout that it also rarely offers. ExxonMobil has been slowly increasing its payout from years to year, and increased it again earlier this year to $3.28 per share.
But it’s the relative price point that I love right now. ExxonMobil stock is trading at about $76 per share. It is at the same price that it was more than three years ago, and is down from its peak of $94 in 2016…and even lower than its $101 peak in 2013.
Even better, there’s a strong floor for the stock at $72.
With a solid balance sheet and free cash flow of over $17 billion in the past twelve months, ExxonMobil is cheap.
What is it?
Chevron operates in essentially the same areas as ExxonMobil does – Upstream and Downstream.
What makes it a cheap stock?
Despite some strong stock performance, Chevron is also one the cheapest oil stocks in the market, and has a leg up on ExxonMobil in terms of positioning.
Chevron has spent a lot of money to upgrade and maintain many of its operations over the years, while ExxonMobil is a bit behind the curve. The big investment is a $4.3 billion project in the Tengiz Field in western Kazakhstan.
Whereas ExxonMobil has struggled since oil prices crashed in 2015, Chevron has done very well, up more than 50% off its lows.
Despite this, it’s EV-To-EBITDA ratio is 8.22, even less than ExxonMobil, and it has a 3.87% yield.
Chevron also has a fantastic balance sheet, with over $37 billion in cash and investments offsetting $33.48 billion in debt.