Crude oil prices started the year hot. Since Russia’s invasion of Ukraine earlier this year, oil prices have risen from $80 a barrel to $125 a barrel. However, crude oil has cooled significantly since this summer, falling steadily into the low $80s due to macroeconomic concerns. A drop in crude oil prices of more than 20% means that oil is in a bear market.
A new one though bull market as oil appears to be coming next year. That’s why crude oil looks like it’s on the way to a recovery that could deliver big profits oil reserves.
Wall Street is strongly bullish on oil
Most oil market analysts believe oil prices will be much higher next year. Case in point: Jeff Currie, global head of commodities at a respected investment bank Goldman Sachshas a forecast of $110 for Brent oil (the global benchmark price) in 2023. A rival investment bank Morgan Stanley agrees, expecting Brent to break above $110 a barrel by the middle of next year. While others are not as bullish, the consensus is that oil prices will recover in 2023.
Analysts point to several catalysts that should drive crude oil’s recovery in 2023. Morgan Stanley summed it up in a note to clients. The bank wrote: “We remain constructive on oil prices due to recovery in demand (reopening of China, recovery of aviation) against limited supply due to low investment, Russian supply risks, end of SPR issuance and slowdown in US shale.”
The biggest catalyst is China. “The demand outside of China is going to be huge,” said Amrita Sen, director of research at Energy Aspects. It Wall Street Magazine. Sen believes that “it could change demand by at least a million barrels per day, and it could easily change the oil price forecast to $95-105 from $120-130.”
Meanwhile, most oil companies plan to continue capping investment spending and output relatively tightly. For example, while the oil giant Chevron (CVX: -1.36%) plans to increase its capital budget by 25% to $17 billion next year, much of that growth is driven by inflation and rising low-carbon investment costs. Likewise, though ExxonMobil (XOM: -0.70%) plans to increase capital spending from $22 billion this year to $23-25 billion in 2023., it expects its output to remain flat at around 3.7 million barrels of oil equivalent per day. With demand poised to increase amid continued supply constraints, oil prices look poised to rise.
A boon for oil stocks
This prospect of higher oil prices bodes well for oil companies in 2023. This will enable them to continue to generate high revenue and cash flow. Meanwhile, with most oil companies curbing investment spending, they will have more money to return to their shareholders through buybacks and dividends.
Oil giants Chevron and ExxonMobil are well positioned for higher crude prices next year. However, three other manufacturers stand out as even more compelling buys right now. It is one of them Marathon oil (MRO: -1.90%). It trades at a low barrel valuation compared to its peers (the higher the free cash flow (FCF) yield, the lower the price-to-free cash flow ratio);
That’s why Marathon Oil is using its oil-fueled windfall to gobble up its dirt-cheap stocks this year. The oil company has already retired 20% of its outstanding shares. It also used its oil-fueled cash flow to buy Ensign Natural Resources for $3 billion. That deal would boost its free cash flow by 15%, assuming recent oil prices, and by an even bigger percentage if oil prices rise. That deal could give Marathon more fuel to buy back shares next year.
Diamondback Energy (FANG: -2.23%) is another dirty cheap oil stock. That’s a big reason it offers investors a high dividend yield, currently in excess of 6.5%. Another reason is its variable dividend strategy. Notably, Diamondback changed its capital allocation strategy last quarter, paying a lower variable dividend so it could buy back more of its shares. The company can continue to pay big dividends and buy back more stock next year. He is even better positioned to capitalize on high oil prices after recently agreeing to spend $3.3 billion to buy two cash-strapped oil companies. Those deals allow it to generate more free cash next year.
Finally, analysts see around 60% upside potential in Devon Energy (DVN: -2.44%). They point to its strong balance sheet, extensive drilling inventory and variable dividend range. Another upside catalyst is that Devon recently closed two deals that it expects to boost its cash flow by 25% in the fourth quarter. Those gains put it in a better position to capitalize on higher oil prices next year.
High oil reserves
Oil looks set to rise sharply in 2023. While higher prices will benefit all oil stocks, Marathon, Diamondback and Devon stand out as best positioned to take advantage of higher crude prices. All three have recently made cash flows that could give them more money to buy back their cheap stock and pay dividends. That makes them the top oil stocks to buy through 2023.
Matthew DiLallo holds positions in ConocoPhillips. The Motley Fool has positions in and advises on Apa, EOG Resources and Goldman Sachs Group. The Motley Fool recommends Murphy Oil and Pioneer Natural Resources. The Motley Fool has a disclosure policy.