You can take a more comprehensive strategy by using exchange-traded funds to own baskets of companies if you think now is the best time to buy oil stocks. However, you must exercise greater caution if you want to invest in particular businesses engaged in the production and delivery of oil. You might start your investigation by examining information that could reduce risk.
It was impossible to predict how much effort Iran’s leadership would put into carrying out threats to close the Strait of Hormuz or otherwise restrict the flow of oil after the U.S. bombed Iranian nuclear installations.
The Strait of Hormuz carried an average of 20.9 million barrels of oil per day in 2023, “the equivalent of about 20% of global petroleum liquids consumption,” according to the U.S. Energy Information Administration.
West Texas Crude Oil for July delivery (CL.1) was up a little to $74.12 a barrel early on Monday.
Owning shares of the Energy Sector SPDR ETF XLE is a clear method to get a broad play on U.S. producers of natural gas and oil. All 23 of the S&P 500 SPX’s energy-related stocks are held by this exchange-traded fund, which is weighted by market size. This indicates that Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), its two biggest holdings, together account for 39% of the fund.
Because the S&P 500 is weighted by market capitalization, the SPDR S&P 500 ETF Trust SPY, which tracks it, is likewise a somewhat concentrated bet, with its top three holdings—Apple Inc. (AAPL), Nvidia Corp. (NVDA), and Microsoft Corp. (MSFT)—accounting for 20% of the portfolio overall.
The energy industry is still inexpensive.
The 11 S&P 500 sectors are listed here, arranged ascendingly by forward price-to-earnings ratios. At the bottom of the list is the complete index. These are weighted price-to-earnings-per-share ratios that are split by the consensus estimates of analysts surveyed by FactSet. In order to account for the trend of the S&P 500 declining 18% in 2022, followed by the bull market of 2023 and 2024, the table also displays total returns with dividends reinvested through Friday for 2025 and from the end of 2021.
Out of the 11 sectors, the energy sector of the S&P 500 has the lowest forward P/E. The reason why many investors find it difficult to trust the sector can be better understood by looking at this chart, which displays front-month WTI prices over the previous 15 years:
The most important event depicted in the figure is the lengthy downturn that started in July 2014, excepting the brief and painful disruption during the early stages of the COVID-19 outbreak, when front-month WTI prices fell to zero due to a collapse in demand. The United States was now the biggest oil producer in the world. In retrospect, the imbalance brought about by overproduction resulted in bankruptcies and mergers among domestic producers who were less resilient.
U.S. oil executives have long emphasized cautious production expansion, capital efficiency, and rewarding shareholders with dividends and stock repurchases in their remarks during quarterly conference calls. In order to increase earnings (and cash flow) per share, the latter may reduce the number of shares.
See also: 20 S&P 500 firms whose stock buybacks have yielded the biggest returns for investors
A screen for an oil stock
You could start researching individual energy stocks with the help of this screen.
We started with the holdings of two larger ETFS in order to broaden the list rather than just filtering the 23 businesses in the S&P 500 energy category.
— 52 equities of US firms in the S&P Total Market Index that belong to the “Oil, Gas and Consumable Fuels” Global Industrial Classification Standard (GICS) group are held by the SPDR S&P Oil & Gas Exploration & Production ETF XOP. Every quarter, the fund is rebalanced, and each position is given an equal proportion.
— The S&P Global 1200 Energy Capped Index is tracked by the iShares Global Energy ETF IXC. With a modified weighting that effectively caps individual holdings at 22.5% of the fund, it consists of 52 equities. Exxon and Chevron together account for 27.4% of the portfolio. ConocoPhillips COP, TotalEnergies SE FR:TTE, and Shell PLC UK:SHEL complete the top five holdings. Together, these five businesses account for 44.7% of the IXC portfolio.
XOP and IXC together own 89 stocks of businesses in 16 different countries.
Checking the quality of oil stocks
The cash flow that remains after capital expenditures is known as a company’s free cash flow. This money can be utilized for stock buybacks, dividends, acquisitions, expansion, and other business needs.
A company’s expected free-cash-flow yield may be calculated by dividing its share price by the consensus estimate of its free cash flow per share for the upcoming year. This can be contrasted with its dividend yield to determine whether there seems to be “headroom” for extra funds to be used for share buybacks, greater dividends, or other initiatives that would ideally benefit shareholders.
We began by reducing our list of 89 companies owned by XOP and/or IXC to 74 for whom at least nine analysts from brokerage or research firms surveyed by FactSet had provided estimates or ratings.
Estimated forward FCF yields were provided for 66 of the remaining 74 firms.
Returning to the industry’s emphasis on capital efficiency, we further reduced the list by examining long-term debt to equity ratios. According to FactSet, XOP’s weighted debt-to-equity ratio is 62%. The debt-to-equity ratio for IXC is 55%. The debt-to-equity ratios of the biggest oil firms are low.
