Oil stocks are on the rise. Consider these two for long-term investment.

Oil Market Volatility Highlights Value in Energy Stocks

Recent events in Iran have led to a surge in oil prices, serving as a reminder to investors of the importance of including oil stocks in a diversified investment strategy. Despite a recent uptick in shares of Devon Energy (NYSE: DVN) and Diamondback Energy (NASDAQ: FANG), the energy sector has generally been overlooked in recent years. These companies continue to offer strong value for those seeking exposure to North American oil production. Here’s a closer look at why they stand out.

Attractive Investments Regardless of Oil Price Fluctuations

Oil began the year trading near $57 per barrel and has since climbed to around $88. The future direction of oil prices remains highly uncertain due to the unpredictable nature of geopolitical tensions and their impact on global supply and transportation.

Preparing for the possibility of sustained high oil prices is prudent, especially when these stocks remain appealing even if oil prices retreat to $50 per barrel. Both Devon and Diamondback have adapted their business models since the oil price downturn in late 2023, positioning themselves to perform well even at lower price points—making any upside from higher prices an added benefit.

These U.S.-based oil producers focus on efficient, low-cost operations, minimizing direct exposure to Middle Eastern conflicts. For domestic producers, maintaining a low break-even price—the minimum oil price needed to generate positive cash flow—is crucial for long-term success.

Diamondback Energy: Focused and Disciplined

Diamondback Energy’s strategy centers on the Permian Basin, emphasizing careful capital management and operational efficiency. The company boosts productivity by optimizing drilling operations and developing secondary assets rather than pursuing aggressive acquisitions.

This disciplined approach enables Diamondback to support a base dividend of $4.20 per share (yielding 2.2% at current prices). The company also employs strategic hedging to guard against price declines, while retaining the potential to benefit from oil prices above $50 per barrel.

Devon Energy: Growth Through Strategic Mergers

Devon Energy, much like Diamondback, has used acquisitions to expand its footprint and achieve cost efficiencies, particularly in the Permian Basin. Its upcoming merger with Coterra Energy, announced in February, is expected to unlock significant synergies in the Delaware Basin.

By adding Coterra’s 346,000 acres to its existing 400,000, Devon will nearly double its presence in the Delaware Basin. The merged company will hold the largest inventory in the region, with most assets capable of generating profits at oil prices below $40 per barrel. The vast majority of its holdings will remain profitable even if prices fall below $50 per barrel.

Why These Energy Stocks Stand Out

Both Devon and Diamondback currently trade at very low price-to-free cash flow ratios, making them attractive from a valuation perspective.

Their combination of strong fundamentals, low break-even costs, and the potential for gains if oil prices stay elevated makes these companies compelling options for investors seeking exposure to the energy sector.

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