Many have been thinking that energy prices could stabilize with rising interest rates and a slowing economy. Yet, JPMorgan (JPM, Financial) dropped a bombshell last week when its analysts released a statement claiming that they expect oil prices could more than triple to reach $380 per barrel.
According to the bank's research team: "The most obvious and likely risk with a price cap is that Russia might choose not to participate and instead retaliate by reducing exports... It is likely that the government could retaliate by cutting output as a way to inflict pain on the West. The tightness of the global oil market is on Russia's side."
I think it's debatable whether oil prices will surge to the absurd level of $380 per barrel. However, if you believe oil prices are set to rise again, here are three of my top top "best in class" picks for the energy sector.
1) Matador Resources
This is an up-and-coming vertically integrated energy company with a beta of 3.83, meaning that it's a suitable investment for those seeking excess risk.
Matador's operations span approximately 125,000 acres in the Delaware Basin, 25,100 acres in Eagle Ford and 17,700 acres in Haynesville/Cotton Valley, which provides the company with low-cost opportunities. Moreover, Matador's dual ownership of San Mateo provides it with a midstream bridge to improve its pricing power, which is conveyed by its gross margin of 85.32%.
Also, Matador Resources has a phenomenal earnings yield that is roughly six times the growth rate of the United States' GDP, indicating that its earnings (and thus its stock price) could grow exponentially in the coming years.
2) Devon Energy
Devon Energy has been one of the big winners during the energy bull market. The company's stock has risen by nearly 90% year-over-year and pays a dividend of $5.08 per share for a yield of 9.22%. Moreover, the stock is still undervalued as its price-earnings and price-to-cash-flow ratios are trading at five-year discounts of 44.79% and 23.71%, respectively.
The company is spending its earnings wisely as it's planning on expanding its operations in North Dakota by acquiring RimRock in the Williston Basin. The leasehold's first-quarter production was approximately 15,000 barrels per day, indicating the value it would add to Devon Energy moving forward.
Based on its $6.14 billion in cash from operations, it's likely that Devon Energy will provide a good blend of shareholder compensation and use a portion of its cash flow to expand into promising projects.
3) The Energy Select Sector SPDR ETF
The Energy Select Sector SPDR (XLE, Financial) ETF is an option for investors seeking to reduce idiosyncratic risk by investing in a diversified portfolio of energy stocks at little cost. The Energy Select Sector SPDR ETF has a portfolio of 24 stocks, with the likes of Exxon Mobil (XOM, Financial), Chevron (CVX, Financial) and Occidental Petroleum (OXY, Financial) being among its primary holdings.
The Energy Select Sector SPDR ETF pays a lucrative dividend with a forward yield of 4.49%. In addition, the ETF has risen by more than 25% since the turn of the year, conveying its attributes as a diversification vehicle as its negatively correlated to the current bear market.
Furthermore, the Energy Select Sector SPDR ETF exhibits high liquidity with a turnover ratio of 14%, meaning that it's likely to reflect the fair value of its underlying assets.
Concluding thoughts
There's no guarantee that oil prices will surge in the coming years. However, if JPMorgan's prediction of $380 per barrel comes to fruition, oil companies that can take advantage of this are all but certain to be some of the best stock investments in the market.