Wolfe Research has identified its top picks in the oil sector as analysts caution that recent sector performance has lifted valuations to levels that may not be compelling beyond a higher long-term oil price view. The firm maintains a selective approach, emphasizing absolute value and rate of change as key screening criteria.
Recent oil price strength has lifted the immediate earnings outlook to levels not seen since 2022, with average earnings for global majors and exploration and production companies moving up 36% for first quarter 2026 and full year 2026. However, the translation to value is tempered by price lags and price structure, according to the research firm.
Unlock the hottest news by upgrading to InvestingPro - get 50% off today
APA Corporation - Wolfe Research’s top pick faces a complex valuation picture. Sector performance year-to-date has lifted valuations for some companies to levels that are not compelling beyond a higher long-term oil view. The firm remains constructive on the long-term oil price but not on a timeline that outweighs spot price risk, leading to a selective stance.
APA Corporation reported fourth-quarter earnings that beat EPS forecasts, though revenue was slightly below expectations. The company also received an upgrade from Barclays to Equalweight and a price target increase from Raymond James.
BP p.l.c. - Energy sector valuations appear full at strip prices for some companies. Factor rotation had already lifted the XLE by 23% through February 28, and combined with rapid inflection in oil prices, absolute sector performance year-to-date is closer to 30%. The incremental change is consistent with limited discounted cash flow impact of incremental free cash flow, particularly with an increasingly backwardated oil curve.
BP p.l.c. has been directed to cut production at major oilfields in southern Iraq and is also in discussions with Mexico for potential new oil exploration deals. The company is also seeking licenses for natural gas projects in Trinidad and Venezuela.
Devon Energy - Recent oil price strength has boosted the immediate earnings outlook significantly. However, earnings transparency is distorted by physical oil and product markets exhibiting abnormal price swings that contradict normal relative price relationships. The company benefits from marking to market for actual price indicators.
In recent developments, Devon Energy’s proposed merger with Coterra Energy has cleared the Hart-Scott-Rodino antitrust waiting period. Additionally, both TD Cowen and Raymond James raised their price targets on the company’s stock.
Ovintiv - Spot prices have equal probability to spike or collapse dependent on the duration of geopolitical conflicts. Any sign of normalized flows may signal an end to what has been an indiscriminate pivot towards energy. The firm believes acknowledging exogenous influence in sector performance means some level of caution is warranted.
Ovintiv Inc. announced fourth-quarter results that surpassed earnings per share expectations while meeting revenue forecasts. The company also saw BofA Securities raise its price target, while Truist and Morgan Stanley initiated coverage.
Occidental Petroleum - Wolfe’s valuation framework is defined as free cash flow times duration, adjusted for capital structure. Strip remains the base case to screen absolute value, though absolute sector performance year-to-date has captured the bulk of the upside move in the forward curve.
Occidental Petroleum received upgrades to Overweight from both Wells Fargo and Piper Sandler, citing improved capital efficiency. There have also been reports that CEO Vicki Hollub is preparing to retire.
TotalEnergies - The firm maintains relative preference for names where it sees absolute value at strip prices, particularly where rate of change can differentiate absolute performance, including the transfer of value from net debt to equity.
TotalEnergies reported fourth-quarter adjusted earnings that exceeded analyst expectations, with revenue also coming in significantly above consensus. The company also noted it has lost 15% of its oil and gas output due to regional conflicts shutting down fields in the Middle East.
ConocoPhillips - Wolfe continues to view the biggest beneficiaries of transitory windfalls across oil, gas and refining as deleveraging events.
ConocoPhillips is reportedly exploring a sale of some Permian Basin assets, while Goldman Sachs added the company to its conviction list. Separately, Roth/MKM downgraded the stock to Neutral, and Truist initiated coverage with a Hold rating.
