The Best Oil Stocks to Buy Now, According to the Pros

Oil stocks followed up an incredible 2022 with dismal returns through the first three months of the new year. But a surprise production cut on the part of OPEC and its allies might be just the catalyst the best oil stocks need to return to their market-beating ways.

To recap: the broader market logged historically disappointing results last year, with the S&P 500 generating a total return (price change plus dividends) of -18.1%. Happily for investors in the oil patch, oil exploration and production companies most certainly did not go along for the ride. 

Indeed, the Energy Select Sector SPDR Fund (XLE), which is the largest and most widely traded oil exploration and production exchange-traded fund, generated a total return of more than 64%.

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Investors who bid up shares in such firms were simply following the money as rising oil prices filled the exploration and production companies' coffers. Rather than plow much of their newfound wealth into capital expenditures, oil companies directed their gushers of free cash flow back into shareholders' pockets via share buybacks, rising dividends and variable dividends. 

But the party couldn't last forever – or at least so it seemed. U.S. benchmark West Texas Intermediate crude oil spot prices topped out at $121.52 a barrel back in early June 2022 – and then went on to lose 45% of their value through mid-March 2023. 

Oil stocks followed suit. While the S&P 500 generated a total return of 7.5% in the first quarter, XLE's total return amounted to -4.3%.

OPEC+ and the bull case for the best oil stocks

The production cut announced by the Organization of the Petroleum Exporting Countries and its allies (OPEC+) has dramatically changed the outlook for oil prices in 2023 and beyond, analysts say. 

"On the back of this bullish surprise, we nudged up our oil price forecast and now expect [international benchmark] Brent [crude oil] to rise to $95 per barrel by December 2023, and to $100 per barrel from April 2024 onward," writes Daan Struyven, senior energy economist at Goldman Sachs Commodities Research. 

For context, Brent crude has traded in a 52-week range of $70.12 to $125.19 per barrel, so Goldman Sachs' forecast represents something of a return to the "good old days" of 2022.

Importantly, with U.S. producers prioritizing returning cash to shareholders over expanding production, the OPEC+ cuts will have real bite, note Stifel analysts Derrick Whitfield and Nate Pendleton.

"OPEC+'s announcement is aligned with our previous view that it is hard to be too bearish on oil prices in the short-to-medium term given the willingness OPEC+ has shown to actively manage oil markets and protect prices," the analysts write.

With the outlook for oil stocks suddenly much more bullish, it seemed like a good time to see which S&P 500 exploration and production oil stocks get the highest recommendations from industry analysts.

To that end, we screened the S&P 500's oil & gas sector for oil stocks with the highest consensus Buy recommendations, based on S&P Global Market Intelligence data.

A quick note on S&P Global Market Intelligence's ratings system: S&P surveys analysts' stock recommendations and scores them on a five-point scale, where 1.0 equals a Strong Buy and 5.0 is a Strong Sell. Any score equal to or below 2.5 means that analysts, on average, rate the stock at Buy. The closer a score gets to 1.0, the stronger the consensus Buy recommendation.

Below please find Wall Street's highest rated oil stocks to buy now. (Stocks are listed in reverse order of analysts' consensus recommendations, from lowest to highest conviction. Ratings and market data are as of April 5.)

3. ConocoPhillips

• Market value: $130.2 billion
• Dividend yield: 2.2% 
• Analysts' consensus recommendation: 1.85 (Buy)

Shares in ConocoPhillips (COP) are up more than 7% since OPEC+ announced its production cut, and analysts say they have plenty more room to run.

"We continue to believe that a company's balance sheet strength and place on the cost curve are critical, and favor those exploration and production companies that are well positioned to manage a potentially long period of volatile oil prices," writes Argus Research analyst Bill Selesky (Buy). "We believe that COP is one of these companies."

Raymond James analyst John Freeman (Strong Buy) adds that the Biden administration's recent approval of COP's Alaska Willow Project is another long-term tailwind for the company. At its peak, Willow is expected to produce a sum of oil equivalent to nearly 40% of the state's current oil production, Freeman writes. 

Of the 26 analysts covering COP tracked by S&P Global Market Intelligence, 12 rate it at Strong Buy, seven say Buy, six have it at Hold and one slaps a rare Sell rating on shares. That works out to a consensus recommendation of Buy, with high conviction. 

With an average price target of $130.42, Wall Street gives COP implied price upside of about 22% in the next 12 months or so. Add in the dividend yield, and the implied total return comes to about 25%. 

2. EOG Resources

• Market value: $69.4 billion
• Dividend yield: 2.8% 
• Analysts' consensus recommendation: 1.71 (Buy)

EOG Resources (EOG) is another oil and gas exploration and production company that analysts say is primed to pump gushers of free cash flow back to its shareholders.

EOG, which generated a total return of 57% last year, is off by about 6% so far in 2023. However, the stock has rallied 8% since hitting a year-to-date closing low in mid-March, and the Street sees more outperformance ahead. 

Raymond James analyst John Freeman praises EOG's position as one of the largest producers in North America, "with established positions in every major on-shore shale play." 

Although the company posted "slightly disappointing" fourth-quarter results by its own historical standards, Freeman stresses that EOG will have some of the largest production growth in his coverage area. 

"EOG is maintaining this growth while paying out 60% of free cash flow to investors via special dividends," the analyst adds. "EOG's solid balance sheet, shareholder returns, operational expertise, and deep inventory keep us at a Strong Buy." 

Freeman has plenty of company in his bullish stance on EOG. Of the 31 analysts covering the stock tracked by S&P Global Market Intelligence, 16 rate it at Strong Buy, eight say Buy and seven have it a Hold. That works out to a consensus recommendation of Buy, with high conviction. 

Meanwhile, the Street's average target price of $144.87 gives EOG stock implied upside of about 23% in the next year or so. Add in the dividend yield, and the implied total return tops 25%. 

1. Diamondback Energy

• Market value: $25.9 billion
• Dividend yield: 8.0% 
• Analysts' consensus recommendation: 1.61 (Buy)

Diamondback Energy (FANG) is an independent oil and natural gas company with production focused in the Permian Basin of West Texas. FANG returned 35.5% last year, which actually made it a sector laggard.

Unlike many of its peers, however, FANG has managed to generate positive returns in 2023, gaining 5.7% for the year-to-date. And analysts say it's just getting started. 

Bulls cite FANG's compelling valuation – as well as management's commitment to returning cash to shareholders through buybacks and dividends – as just a few reasons to be constructive on the name. 

"Diamondback is well positioned to outperform in the current commodity environment based on its strong cash margins of 77%, defensive attributes (minerals ownership, capital cost leadership, vertical integration, base dividend protected down to $35 per barrel for WTI crude oil), and synergistic ownership of Viper Energy Partners (55% ownership of outstanding shares)," write Stifel analysts Derrick Whitfield and Nate Pendleton (Buy).

Of the 28 analysts issuing ratings on FANG tracked by S&P Global Market Intelligence, 16 call it a Strong Buy, eight say Buy, three have it at Hold and one calls it a Sell. That works out to a consensus recommendation of Buy, with very high conviction. 

Meanwhile, the Street's average price target of $172.97 gives FANG implied price upside of about 23% in the next 12 months or so. Add in the generous dividend yield of 8%, and FANG's implied total return comes to more than 30%.