Oil stocks are still incredibly cheap by The Motley Fool
© Reuters Oil stocks are still incredibly cheap
Energy stocks have rallied strongly this year.
Thanks to the dramatic rise in oil prices that we have witnessed in 2022, many oil and gas investors have become rich.
It’s gotten to the point where many investors believe the trade is overheated. Energy stocks are behaving almost like tech stocks at the height of the 2020/2021 bubble. 50% in six months certainly sounds extreme. And in fact, the gains in oil prices may be behind us. The supply chain crisis probably won’t last forever, and the United States still has more oil in the Strategic Petroleum Reserve than it could release.
However, the rally in oil stocks may not be over. Although oil prices are starting to calm down, companies that extract oil are still very cheap. It is therefore very likely that they will rally on the back of strong earnings, even if oil simply trades flat. If this prediction comes true, oil stocks will ultimately prove to be among the best bear market stocks of 2022.
Current Oil Prices Not Reflected The big thing you need to know about oil stocks today is that their prices don’t even reflect current oil prices. The last time oil was as high as it is now was in 2014. Back then, oil stocks were much more expensive than they are now. In fact, some oil stocks have still not reached their 2018 prices – that year, oil peaked at $77!
Take Suncor Energy (:TSX:)(NYSE:SU), for example. Its 2018 high was $55. Today, it trades for just $49. Yet oil prices this year are about $35 higher than they were in 2018. It is true that Suncor has faced operational and production issues. But thanks to the combination of high oil prices and aggressive debt reduction, SU is expected to top its 2018 earnings in 2022. By the end of the year, its share price should reflect that.
Shockingly Low Cash Flow Multiples Another factor suggesting that oil stocks are still cheap is their cash flow multiple. They are, quite frankly, shockingly low. At today’s prices, SU is trading at 5.5 times cash flow from operations (CFO) and FOUR times CFO futures!
These are weak multiples. And Suncor is not the only oil company to be so cheap. If you look at any other oil company, you will see that their multiples are just as low. Examples include the following:
- Western Oil (NYSE:)
- Cenovus Energy (TSX:)
- Chevron (NYSE:)
All of these companies trade at single-digit cash flow multiples, as does Suncor. So you can buy even the most boring energy ETF right now and get a barrel’s worth for every spend – pun intended!
It’s easy to think that the oil trade is overheated this year. A 50% gain in six months is pretty extreme and usually doesn’t last. But oil prices remain high and oil stocks remain cheap relative to fundamentals. There are many reasons to believe that they will continue to outperform the market in the months to come. Remember that oil stocks were taken down hard from 2015 to 2020. Quite often the recovery from such severe meltdowns is spectacular.
Dumb Contributor Andre Button holds positions with Suncor Energy. The Motley Fool has no position in the stocks mentioned.