The Most Attractive Investment Opportunities in Oil and Gas

OPEC+ has ramped efforts to increase its share of global oil production: It’s announced yet another 411,000 barrels per day increase in crude production for July from June.

Persistently lower oil prices, the end of large leaps in operating efficiency, and less remaining quality acreage in US shale will stress the capital returns model adopted by operators there.

The US Energy Information Administration expects this new supply will continue to outstrip demand in an already oversupplied market: It forecasts global production will rise by nearly 1.6 mmmb/d in 2025 versus demand growth of 0.8 mmb/d.

This supply/demand imbalance will weigh on oil prices, with the EIA forecasting that Brent will average $63/bbl in the second half of 2025.

On the gas side, we expect European gas prices will likely remain depressed through refilling season.

Despite a decline in Russian gas supply and inventory stock depletion from a cold winter, prices have fallen from over $17 per million British thermal units in February to around $12/mmBtu today. Redirected volumes from China and global trade-related fallout are also likely to contribute to this price decline.

Further, the EU is working to wean itself off its dependence on Russian gas, with a target to fully phase out by 2027. Russia’s share of global natural gas production has fallen to 19% in 2024 versus 45% prior to its invasion of Ukraine.

Here, we outline our expectations for the oil and gas industry and the companies that are best positioned to succeed amid this environment.

3 Key Themes for the Oil & Gas Industry

• OPEC+ aims to take back share will pressure oil prices. Crude prices have languished in the past quarter, driven by OPEC+ accelerating crude production. OPEC+ claims that its latest increase in crude production stems from ensuring quota compliance from its members, but we think the unspoken goal is taking global market share. The US increased its total liquids production share to 22% from 15% over the past decade as OPEC’s share languished.
• Production cuts are more likely in the Permian than in other basins. Permian producers can cut volumes in the basin without materially pressuring their unit economics. This would hurt a supplier like Halliburton HAL. But even with a capital pullback, we still believe EOG Resources EOG and Diamondback Energy FANG can pursue opportunistic buybacks in the long term, given their enviable position on the cost curve and strong balance sheets.
• Geopolitical tensions could move energy stocks higher. The Israel-Iran conflict could create supply disruptions that would drive oil prices higher. Iran has signaled it could close the Strait of Hormuz, one of two critical maritime routes for Middle East crude exports. Iran closing the Strait would reduce 10%-12% of global daily oil production. We don’t see this as likely owing to logistics and because a closure would self-sabotage Iran. We like the discounts in Devon Energy DVN and Occidental Petroleum OXY stock as a geopolitical hedge in investors’ portfolios. If West Texas Intermediate pricing reverts to the low 60s, they could still produce profitably and return capital to shareholders this year.

Our Overview: Oil & Gas Industries

US rig count is currently sitting at its lowest level since 2022, and we expect further drilling declines.

Factors pushing the WTI benchmark to the low 60s include:

• OPEC+ supply increases weighing on oil prices
• Continued secondary economic impacts from uncertain trade policy

Further, US oil production now seems more susceptible to a price war with OPEC+ than it used to be. When the shale revolution was in pro-growth mode a decade ago, the best producers adapted and matured, becoming far more capital-disciplined. Yet we think the industry’s leap in efficiency gains has mostly materialized: We agree with exemplary capital allocator Diamondback that geologic headwinds now outweigh the benefits from technology and operational efficiency.

On the gas side, we expect US producers will tap into their inventories of already drilled wells. They will need to see durably higher gas prices before resuming drilling activity, which seems unlikely in the near term on account of this period of heightened uncertainty.

To meaningfully increase drilling activity, producers would need to see continued higher gas prices. We are watching for liquefied natural gas and data center demand to help propel higher gas activity next year, though weaker feedgas demand and subdued power generation lead to a looser gas market in the near term.

4 of the Most Attractive Energy Picks

So far in 2025, we see more energy sector bargains.

Our top picks in the energy sector include:

1. HF Sinclair DINO: Recent merger and acquisition activity should help the firm capture a growing renewable diesel business. We also expect management’s strategy to improve the efficiency and reliability of its portfolio.
2. Schlumberger SLB: Despite near-term cyclical weakness, we like Schlumberger’s long-term offshore project opportunity, its digital investments, and its upside from a successful integration of ChampionX.
3. Hess HES: Anxiety over the proposed Chevron CVX acquisition and Exxon’s arbitration with Chevron create a persistent discount in shares. One party should close the deal, but Hess’ assets look attractive, even on their own.
4. ExxonMobil XOM: Structural operating cost reductions, portfolio improvement, and growth across its upstream, downstream, and chemical segments should help Exxon to double earnings and cash flow from 2019 levels by 2027.