In this piece, we will take a look at the 14 best American energy stocks to buy according to analysts.
Energy, primarily oil, drives the economy. This makes it one of the most important sectors for global and American economic prosperity. This importance has changed the US economic landscape quite a bit over the past couple of years. According to the Energy Information Administration (EIA), 2020 was a historic year for the US energy industry as it was the first time since 1949 that America became a net petroleum exporter. In 2020, the US imported 7.86 million barrels of oil per day, which was 640,000 barrels lower than its 8.50 million barrels per day of exports. Since then, US energy exports have continued to grow, and the oil surplus jumped to a record of 1.26 million barrels per day in 2022.
At the heart of this historic shift is the American energy industry which produced a historic 20.08 million barrels per day in 2022. This was nearly enough to theoretically meet America’s oil consumption of 20.28 million barrels, but despite this, the US continued to import oil. On the surface, this sounds counterintuitive since a net energy exporter should be sufficient to meet all of its requirements through its own production. However, as America has historically depended on sour oil imports from the Middle East, US shale, which is sweet oil with low sulfur content, cannot be processed in similar volumes due to its different chemical characteristics.
Building on this, even though the US might be unable to use all the oil it produces, on the surface, it would also appear that fewer regulations on the oil industry and more drilling would be great for the sector. Well, the reality, as is in most cases, is slightly different. This is because low regulations lead to high drilling and end up benefiting firms with high production capacity in the short term. In the long term, as output rises and more companies invest in drilling, the price of oil falls. This appears to be great, after all, who doesn’t like cheap gas prices? However, the US aims to have at least half of all new cars on the roads by 2030 be electric vehicles according to new rules by the Biden Administration. This goal will be fueled by initiatives such as the Inflation Reduction Act (IRA) which has earmarked $500 billion in spending and tax breaks for clean energy technologies and other areas.
So, if half of all new cars by 2030 are EVs and American oil producers end up expanding their production capacity to meet current demand, then they could end up sitting on excess capacity. Oil exploration is one of the most capital intensive industries in the world (upstream capital expenditure sat at $490 billion in 2022 according to the International Energy Forum) and recovering these costs requires steady demand. As a result, if regulations are strict, as opposed to lax, then oil producers will be forced to generate higher margins which carry the chance of improving production efficiency and lead to profit maximization that moves in line with the lower EV costs (and higher proliferation) of the future.
Shifting gears to focus on energy stocks, their performance depends quite a bit on energy prices. This was the case in 2022 when the Russian invasion of Ukraine disrupted the global energy supply chain and led to crude oil prices shooting to as high as $134 per barrel. During the same year, State Street’s energy ETF shot up by 54% as oil companies all over benefited from record revenue and profits. However, the outlook for the energy industry in 2024 isn’t as optimistic.
While the same ETF has gained 9.5% year to date, Brent crude opened 2024 at roughly $78 per barrel and is trading at $78.5 right now. For the second half of 2024, the EIA estimates that it will trade at $89 per barrel – higher than the first half average of $84. This is despite the fact that the world’s largest oil user, China, is facing an uncertain economy that has led some to believe that its oil consumption could drop by 3.8% in the year’s second half with diesel usage dropping by 5.6% annually. In fact, as FactSet notes, this “lower-than-forecast” global demand growth coupled with production increases might lead to an oversupplied oil market. If this is true, then the subsequent downward oil price adjustments could also lead oil stocks lower – and make current valuations overvalued.
With these details in mind, let’s take a look at the best American energy stocks to buy according to analysts.
A row of massive oil rigs in a desert landscape, against a setting sun.
Our Methodology
To make our list of the best American energy stocks to buy according to analysts, we ranked US based energy stocks with a market cap greater than $300 million by their average analyst share price target upside and picked out the stocks with the highest upside.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
14. Vital Energy, Inc. (NYSE:VTLE)
Number of Hedge Fund Investors in Q1 2024: 32
Average Analyst Share Price Target Upside: 51.57%
Average Analyst Share Price Target: $64.75
Vital Energy, Inc. (NYSE:VTLE) is a small oil and gas company headquartered in Tulsa, Oklahoma. The firm, like other American oil producers, is busy expanding its production portfolio through acquisitions. The US shale sector has been focusing on acquisitions for the past two years, and through its deals, Vital Energy, Inc. (NYSE:VTLE) aims to expand its production base in the Delaware base regions. While expanding through acquisitions is a solid growth strategy as it provides oil companies with greater control of assets, Vital Energy, Inc. (NYSE:VTLE) currently has $1.6 billion of debt. The latest acquisition that expanded the firm’s presence in Delaware came with an $880 million price tag will be financed through a revolving credit facility that could strain earnings in the future and force Vital Energy, Inc. (NYSE:VTLE) to operate with greater profitability.
Vital Energy, Inc. (NYSE:VTLE)’s management commented on its production during the Q1 2024 earnings call. Sustained production is key to financing its growth, and according to them:
“As a company, we’re pursuing multiple paths to reduce breakevens and extend inventory. We are improving productivity by extending lateral lengths, pumping high intensity completions, testing and proving up new horizons, implementing a wide array of new technologies, acquiring new assets, improving base operations and so much more. We’ve increased our average well productivity by 35% since 2019, and nearly 95% of our oil production comes from assets we acquired in the past five years. We have been consistent in our strategy to create value by building depth and quality of inventory, while also improving our financial structure and generating free cash flow.”
13. Talos Energy Inc. (NYSE:TALO)
Number of Hedge Fund Investors in Q1 2024: 26
Average Analyst Share Price Target Upside: 54.23%
Average Analyst Share Price Target: $18.06
Talos Energy Inc. (NYSE:TALO) is a Texas based oil and gas producer. A key metric for evaluating small oil and gas companies is the free cash flow, and for Talos Energy Inc. (NYSE:TALO), the firm generated $506 million in FCF in 2023 and has grown this to $548 million in the trailing twelve months. The FCF creates significant room for Talos Energy Inc. (NYSE:TALO) to grow its portfolio of exploration properties, which is key for performance in the US shale industry. The firm already completed an acquisition in March 2024 for a $1.29 billion price tag, and it enabled Talos Energy Inc. (NYSE:TALO) to grow its 2024 oil production guidance by two million barrels. Its current ratio of 0.78 leaves some room for more acquisitions, which should be a key point for the stock moving forward.
Talos Energy Inc. (NYSE:TALO) commented on its balance sheet stability and growth strategy during the Q1 2024 earnings call where it shared:
“We also remain steadfast in our debt reduction goals, as we mentioned earlier, and we have increased that goal from $400 million to $550 million. In our capital investments for 2024, we have a mixed of development and exploration and we believe that is the right mix to create the most value for shareholders in the long run. Lastly, M&A continues to be a pillar of our strategy and we continue to actively seek further accretive M&A opportunities to accelerate our growth trajectory, deliver on our strategy, and create further value for shareholders. And now I’d like to turn the call back to Tim to wrap up with our key takeaways for the quarter.”
