Top Oil and Gas Stocks for Q3 2023

Saturn Oil & Gas, Vertex Energy, and YPF SA are top for value, growth, and momentum, respectively

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Top oil and gas stocks this month include YPF SA, Weatherford International PLC, and Vista Energy S.A.B. de CV, the share prices of which have more than quadrupled in the past year.

Industrial stocks, as represented by the Energy Select Sector SPDR ETF (XLE), have risen 19% in the past 12 months compared with a 15% gain for the Russell 1000, which tracks the largest-capitalization U.S. stocks.

Here are the top three industrial stocks each with the best value, the fastest growth, and the most momentum. All data is as of July 14.

These are the oil and gas stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. A low P/E ratio shows that you're paying less for each dollar of profit generated. Profit can be returned to shareholders in the form of dividends and share buybacks.

Source: YCharts

These are the top oil and gas stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and their most recent quarterly YOY earnings-per-share (EPS) growth.

Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of more than 1,000% were excluded as outliers.

Source: YCharts

These are the oil and gas stocks that had the highest total return over the past 12 months. Companies with total returns over 1,000% were excluded as outliers.

Source: YCharts

Inflation/interest rate hedge: Historically, rising inflation has been correlated with higher oil prices, offering investors a potential portfolio hedge by investing in oil and gas stocks. Typically, the Federal Reserve raises interest rates to tackle inflation, aiming to lower consumer demand. According to Bob Iaccino, co-founder of Path Trading Partners, the price of West Texas Intermediate (WTI) crude contracts over the past six rate-tightening cycles has risen by an average of 16.06% six months after each rate hike.

Tax advantages: Investing in oil and gas stocks provides investors and producers with a range of unique tax benefits. Some key advantages include the favorable way active and passive income is treated and the deduction of certain drilling and lease costs. For instance, the Internal Revenue Service (IRS) tax code considers earnings from oil and gas royalties as passive income, while categorizing net losses as active income. This may enable some investors to offset their production revenue losses from other forms of income, such as capital gains.

Tightening government regulations: Oil and gas stocks face increasing challenges from environmental regulations as governments set targets for lowering carbon emissions and continue to encourage the transition from fossil fuels to renewable energy sources. Stocks in the sector already have high capital expenditure (CapEx); therefore, adding more costs to meet climate goals eats into cash reserves, especially if energy prices start to fall.

Price volatility: Oil and gas stocks are prone to significant commodity price volatility, driven by supply-and-demand fundamentals and geopolitical events. For example, a surprise decision to increase production by the Organization of the Petroleum Exporting Countries (OPEC) members can cause a sharp drop in oil prices. Conversely, war breaking out can lead to a surge in energy prices. For instance, due to Russia's position as the world's largest gas exporter, natural gas prices gained around 75% in the first half of 2022 following Russia's invasion of Ukraine.

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As of the date this article was written, the author does not own any of the above stocks.

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