With oil prices reacting to uncertainty around a possible U.S. Iran deal and the future of the Strait of Hormuz, energy stocks are back in the spotlight for both positive and negative reasons. Supply fears can quickly reshape expectations, which creates openings for prepared investors and risks for anyone caught off guard. This article looks at 3 large oil and gas stocks exposed to this news and what that might mean for your watchlist.

The three stocks highlighted below are just a sample from this theme, and the full screen surfaced 30 more large energy companies with equally compelling stories that are not covered here. If you want to go straight to the data, use the Energy Sector (Oil & Gas) screener to identify, filter, and analyze the oil and gas stocks that best fit your own conviction and risk profile.

Precision Drilling (TSX:PD)

Precision Drilling is a Calgary based oilfield services company that drills and services onshore wells for oil, gas, and geothermal producers across North America and selected international markets. Most of its CA$1.9b revenue comes from Contract Drilling Services at about CA$1.6b, while Completion and Production Services add roughly CA$291 million. The company sits in mid cap territory with a market value of about CA$1.3b.

Investors watching the recent Strait of Hormuz uncertainty might see Precision Drilling as a direct way to gain exposure to higher oil price driven activity, since its rigs tend to see stronger demand when producers step up drilling programs. The company is investing heavily in automation and lower emission technology, has been buying back shares, and trades at a discount to intrinsic value estimates. However, it is still working through uneven profitability and relies heavily on North American markets and external borrowing. For anyone comfortable with energy cycles and some balance sheet risk, the mix of growth plans and cost improvements could make Precision Drilling a stock worth a closer look.

Precision Drilling’s push into automation, lower emission rigs, and share buybacks could be masking an even bigger story. Get the full picture in the 3 key rewards and 1 important warning sign

Build your own drilling and energy shortlist

Precision Drilling and the two other stocks in this article all surfaced from a single screener, but the real opportunity is tailoring the filters to your own approach. Use our customisable Screener to mix valuation, balance sheet, risk and income metrics, or browse our curated Investing Ideas for ready made starting points.

Riley Exploration Permian (REPX)

Riley Exploration Permian is an independent oil and gas producer focused on acquiring, drilling, and developing wells in the Permian Basin, with acreage across Yoakum County in Texas and the Yeso trend in Eddy County, New Mexico. All of its US$483.86 million revenue comes from oil and gas exploration and production activities in the United States. The company sits in small cap territory with a market value of about US$758 million.

Riley Exploration Permian gives you direct exposure to oil prices at a time when Strait of Hormuz uncertainty is front and center, and the company says it can keep growing its drilling program even at US$60 oil. Management reports a large inventory of wells, efficient operations that can drill 50 plus wells a year per rig, and index inclusion that may broaden investor interest. However, there are real questions around heavy use of external funding, insider selling, and how much of recent earnings power is tied to one off gains. For investors who want leveraged oil exposure but are cautious about balance sheet risk and project execution, the full story around Riley’s New Mexico infrastructure build out and capital returns may be worth a closer look.

Riley Exploration Permian’s capital-hungry growth story and heavy external funding hint at a much sharper risk reward trade off than the headline numbers suggest. Walk through the full picture in the 5 key rewards and 2 important warning signs

Surge Energy (TSX:SGY)

Surge Energy is a Calgary based oil and gas producer focused on exploring and developing light and medium crude assets across Western Canada, including Sparky Alberta, Southeast Saskatchewan, Greater Sawn, Nevis and Manitoba. The company generates all of its CA$534 million revenue from oil and gas exploration and production, entirely within Canada. Surge Energy currently sits just under the CA$1 billion mark with a market cap of about CA$991 million.

Surge Energy often draws attention when oil prices react to Strait of Hormuz risk, because it is a pure upstream Canadian producer with 87% light and medium crude exposure. Forecast earnings growth of about 34% a year and a 5.2% dividend yield give the stock both income and growth appeal, while recent share buybacks and a long tenured, independent board indicate management confidence in the business. At the same time, earnings slipped in the past year, dividend coverage is thin and there has been meaningful insider selling, so investors face clear trade-offs. If you want to see how rising crude prices, higher expected growth and balance sheet risk all feed into the investment case, this is where the story becomes more complex.

Surge Energy’s mix of 87% light and medium crude, thin dividend cover, and recent insider selling suggests the headline yield is only part of the story. See how the 3 key rewards and 2 important warning signs could change your view

Seeking Fresh Alternatives Beyond Oil

Some of the most interesting stocks often move first while few are watching. Before the next breakout gathers momentum and prices start flying, check these fresh ideas and act now.

• Spot cash rich businesses that can fund growth internally by scanning the list of solid balance sheet and fundamentals (12 results) before the crowd catches on to their financial strength.
• Ride structural themes with disciplined capital by zeroing in on the 8 high quality undiscovered gems while they are still under the radar for now.
• Target consistent income potential as rates shift by reviewing the 5 dividend fortresses before yields start dropping toward more ordinary levels.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.