Last year, the value trade in energy was natural gas.

NYMEX natural gas prices averaged around $2.27/MMBtu and front-month gas prices dipped well below $2.00 in the spring and autumn “shoulder” seasons for gas.  At those prices, even the highest quality producers struggle to generate free cash flow.

Into that bearish backdrop, we saw an opportunity. Specifically, with many investors focused on the weak front-month and spot pricing for natural gas, the market was ignoring the fundamental shifts underway in the US gas market.

Of course, one factor is the ongoing strong growth in US electricity driven, at least to a significant extent, by the build out of energy-hungry data centers needed to facilitate the growth in artificial intelligence (AI) technologies.

However, we believed the bigger and more immediate growth story for natural gas was the start-up of close to 4 billion cubic feet per day (4 bcf/day) of US liquefied natural gas (LNG) export capacity between Q4 2024 and Q1 2026, the fastest-ever pace of US LNG capacity expansion.

We’re clearly seeing that in the US LNG export data from the Energy Information Administration so far this year:

Source: Energy Information Administration

In April 2025, the latest month for which we have final data, US LNG exports reached close to 14.8 bcf/day – a record – thanks to the start-up of significant new capacity on the US Gulf Coast.

That’s the “Year of Natural Gas” theme we’ve been talking about for more than a year now and it’s lifting the entire natural gas futures curve. The current front-month natural gas futures for July 2025 sells for about $3.25/MMBTu; prices for next winter are far higher at almost $4.60/MMBtu for December 2025, $4.90 for January 2026 and $4.60 for February of next year.

Our favorite gas-focused producers (E&Ps) are Expand Energy (NYSE: EXE) and EQT Resources (NYSE: EQT), which are up 47.4% and 56.5% respectively over the past year alone.

To be clear, we continue to see significant upside for our gas-levered names including producers, gas-focused midstream names and our recent portfolio addition, Venture Global (NYSE: VG), which is behind several of the new LNG export terminals opening on the Gulf Coast over the next few years.

However, with natural gas stocks shining in 2025, the value trade in energy today is clearly crude oil.

Crude Value

Much as it took some months for investors to recognize the value in natural gas producers in 2024, it may take some time for oil-focused E&Ps to benefit from the trends we see underway in crude oil right now. However, as is always the case in energy, the time to position your portfolio for the next wave of the supercycle is when prices are in a lull, not when investors are chasing the hottest energy growth stories.

In our latest issue of EIA, we discussed crude oil prices at some length and we won’t repeat that entire analysis in this flash alert. Suffice it to say oil has faces just about every possible piece of bearish news one could imagine this year.

Rising fears of a global recession amid the tariff panic this spring, hammered estimates for global oil demand growth in 2025-26.

And then, in the height of early April panic, OPEC announced the return of 411,000 bbl/day of voluntary oil production restraint starting in May 2025. After that, the cartel has announced two more monthly super-sized production adjustments of 411,000 bbl/day starting in June and July 2025.

That’s three times the pace of production increases the market had expected heading into early 2025.

Yet, despite the barrage of “bad” news, oil prices just couldn’t sustain the break below longstanding technical support at $60 to $65/bbl:

Source: Energy Information Administration (EIA)

And, what’s crucial is the recovery in oil prices above this key support ocurred before the price spike catalyzed by Israeli airstrikes on Iranian nuclear facilities.

In our view, oil prices in the $60’s, or below, are unsustainable over the intermediate term for the same reasons that natural gas prices under $2/MMBtu were unsustainable in 2024.

On the demand side, fears of an imminent recession have abated since the spring and the incoming economic data just hasn’t weakened to levels that suggest rising risk of a downturn. Meanwhile, strength in crack spreads – refining profit margins – suggest that US and global oil demand may be firming up as we enter the peak demand summer driving season.

Surging stock markets in Europe, Latin America, China, India and elsewhere are typically not a sign of weakening global economic growth or rising recession risks.

And that brings us to the supply side.

US oil production has been flat, at best, for several years now and predictions from groups like the International Energy Agency (IEA) for 500,000+ bbl/day of annual production growth from US shale aren’t realistic.

Indeed, the longer prices remain below roughly $70/bbl or so, the more likely we are to see deeper capital spending (CAPEX) cuts from oil-focused US shale producers and an outright decline in US oil output.

While OPEC production hikes are a supply headwind, they’re much smaller than the advertised 1.233 million (411,000 bbl/day over 3 consecutive months). That’s because only Saudi Arabia, and a handful of other Gulf producers, have actually been sticking to their agreed production quotas in recent quarters.

Some of that production boost simply represents OPEC formalizing the reality of existing quota overproduction.

Moreover, we’re just not seeing signs of a massive build in global oil inventories right now. US oil inventories are near 5-year lows with both gasoline and distillate (diesel) inventories below the 5-year seasonal average. So too, quarterly commercial oil inventories in the developed world.

And, while Saudi Arabia can certainly withstand current oil prices for a prolonged period, the country needs Brent oil priced closer to $90/bbl longer term to balance its budget. Sooner or later, oil prices will need to rise to support growing global demand.

And that brings us to this:

Our 3-Part Checklist

In short, we see limited downside risk for oil prices this year below the $60 to $65/bbl range.

However, we’ll likely need to see further evidence of US production restraint and a tightening global supply-demand balance to drive prices back over $75/bbl. That’s unlikely before late 2025 or into early 2026 though it’s quite likely energy stocks could rally in anticipation of improving oil prices.

In this environment, we’re looking for oil producers that tick three main boxes:

1. Low free cash flow breakeven production costs. We prefer shale producers that can break even on a free cash flow basis even if oil were to dip into the $40’s this year. Such producers can generate copious free cash flow with prices above $60/bbl.
2. Low net debt. Generally, during a temporary cyclical downturn in commodity prices, companies with less leverage will outperform those with higher debt burdens. Companies with elevated debt burdens need to prioritize paying down their debt with free cash flow; when commodity prices are lower, and free cash flow generation restrained, the need to pay down debt will limit their ability to pay dividends and buy back stock.
3. Shareholder returns. We favor names that can return capital to shareholders via dividends and share buybacks even through periods of weaker oil prices.

Longer term, we believe Occidental Petroleum (NYSE: OXY) is a high-quality producer with significant appreciation potential.

Indeed, OXY was one of the top performers in the model portfolio for us back in 2021-23 amid the broader rally in crude oil prices from the 2020 lows. We recommended selling about half the position in the portfolio into strength around 2 years ago, booking a significant gain from our initial recommendation.

We also believe the company’s $12 billion deal to buy privately-held CrownRock will ultimately pay off, expanding the company’s footprint in the Midland Basin (the eastern portion of the Permian Basin).

However, OXY now has one of the highest leverage ratios of any of the large, high-quality producers in the Permian Basin at roughly 1.8 times earnings before interest, taxation, depreciation and amortization (EBITDA). With free cash flow likely to remain restrained due to lower oil prices near term, the need to continue paying down debt will limit OXY’s capacity to boost its current dividend or buy back stock.

So, we’re bidding adieu to the remaining portion of our recommended Occidental Petroleum position in the model portfolio. We’ll track the stock as a hold in our coverage universe.

We’re adding a 350-share position to Permian Resources (NYSE: PR) to the model portfolio as a buy under $16.

Permian Resources is a much smaller producer than OXY with acreage focused in the Delaware Basin of the Permian – that’s the western portion of the field including acreage in both west Texas and across the state border in New Mexico.

PR controls roughly 450,000 net acres in the region and produces around 370,000 barrels of oil equivalent per day (Boe/day) consisting of approximately 47% crude oil, 30% natural gas and the remaining (roughly) 23% in the form of natural gas liquids (NGLs) like propane, ethane and butane.

PR ticks all three of the “boxes” we just outlined, and we see significantly more upside for PR than OXY into early 2026.

First up, here’s a look at PR’s Q1 2025 results:

Source: Permian Resources, Energy & Income Advisor Estimates

This is a quick production and free cash flow model we put together for E&Ps we recommend. The top section highlights PR’s production of oil, natural gas and NGLs in Q1 2025. I’ve translated these volumes into barrels of oil equivalent (BOE) where 1 BOE = 1 BBL of oil = 1 BBL of NGLs = 6,000 cubic feet of gas.

The second section includes all the company’s major cash costs for the same quarter. The list includes lease operating expenses (LOE), which represent the cost of maintaining production from existing wells as well as gathering, processing and transportation costs (GP&T), which represents the cost of moving oil and gas from wellhead to market.

Capital Spending (CAPEX) represents primarily the cost of drilling and completing (fracturing and putting into production) new shale wells on the company’s existing acreage.

The other line items – like general and administrative (G&A) expenses and taxes – are common to most companies.

And we’ve presented these costs both in raw terms and in terms of dollars per barrel of oil equivalent of production ($/BOE).

As you can see, PR’s total cash costs per BOE were $28.59 in Q1 2025.

That’s not the same thing as a breakeven cost per barrel of West Texas Intermediate (WTI), because oil accounts for less than half of PR’s production while volumes of NGLs trade at a roughly 65% to 70% discount to WTI on a BOE basis and natural gas priced in west Texas trades at a sizable discount to NYMEX gas prices.

However, as you can see in the third section of my table, PR’s West Texas Intermediate (WTI) crude oil prices realized in Q1 2025 after hedges came in at $71.45/bbl, NGLs were at $23.90 per barrel and natural gas sold for just $1.45 per thousand cubic feet (MCF). Weighing commodity streams by share of PR’s total production, the company’s realized prices per BOE came to $41.62/BOE in Q1, well above that $28.59/BOE breakeven.

Our simple production/free cash flow model pointed to about $437.6 million in Q1 2025 free cash flow and PR reported $459.8 million. The difference is mainly the result of the fact our models seek only to track the basic -production business and exclude certain ancillary sources of cash flow. In short, it’s a rough estimate based on commodity prices and basic production costs and our Q1 2025 model was close enough to be valuable.

So, we extrapolated the model for fiscal year 2025 based on the midpoint of management’s guidance provided in the Q1 2025 conference call. We assumed a $64.45/bbl price for oil in Q2 2025 and $60 for Q3 and Q4. We also assumed NGLs at 30% of WTI for Q2 – Q4 2025 and natural gas constant at the Q1 level of $1.45/mcf.

Here’s the model:

Source: Permian Resources, Energy & Income Advisor Estimates

The bottom line here is that based on these conservative commodity price estimates we show PR generating some $1.37 billion in free cash flow in 2025.

That’s consistent with management commentary on the Q1 2025 conference call that because of ongoing cost reductions and efficiency gains, PR could generate as much free cash flow in 2025 with oil at $60 as it did in 2024 with oil at $75/bbl.

Note that my commodity price estimates also include PR’s oil hedges, which amount to around one-quarter of Q2 to Q4 2025 production at prices near $73/bbl.

Also note that the modeled price of natural gas, while depressed, has only a limited impact on PR’s free cash flow outlook. For example, if I use the same model and cut the natural gas realization in half to $0.725/Mcf, PR’s total free cash flow declines by only around $178 million or 13%.

Similarly, if I more than double the natural gas realization to $3/mcf, free cash flow rises $380 million or about 28%.

PR’s economics are driven by oil and, to a lesser extent, natural gas liquids.

Unlike OXY, PR also has low net debt at less than $3.5 billion or around 0.8 to 0.9 times EBITDA.

That’s a huge advantage in the current market environment. Even with oil prices around $60/bbl for WTI, PR will generate close to $1.4 billion in free cash flow this year. Without the need to pay down debt, PR has been deploying significant free cash flow towards dividends, share buybacks and small “bolt-on” acquisitions around its core acreage.

Currently, PR pays a regular quarterly dividend of $0.15 ($0.60 per year). This is NOT a variable dividend paid based on operating cash flow or commodity prices but a regular base dividend that gives the stock a yield of about 4.5% at the current quote, a peer-leading yield for Permian producers.

With 704 million dividend-paying Class A shares outstanding, PR’s annual base dividend amounts to less than $425 million of its expected $1.4 billion in free cash flow.

PR also has a $1 billion buyback authorization in place and management has proved adept at taking advantage of dips in the stock to buy back shares. For example, at the height of the tariff panic PR repurchased 4.1 million shares at an average cost of $10.52 per share.

Look for PR to deploy cash opportunistically on dips to buy back stock.

Finally, we like management’s approach to acquisitions and PR’s strong financial position aids this strategy.

Here’s the understatement of the decade: The energy business is cyclical. That means there are periods of strength, booms and busts. So, when commodity prices are on a downswing, that’s the ideal time to make acquisitions – valuations are lower, and you set up your business to increase production when commodity prices (inevitably) swing to the upside.

Over the last two years, for example, EQT and Expand took advantage of the downswing in gas prices to close significant acquisitions that are paying off in a big way now that natural gas prices are in rally mode.

Because PR has a solid balance sheet and strong free cash flow generation, they’ve been able to make small “bolt-on” type deals opportunistically in recent quarters. This month, for example, they closed on a deal to acquire 13,320 net acres in the New Mexico portion of the Delaware Basin – that’s Lea and Eddy counties in Southeastern New Mexico where PR already holds a large acreage position.

In fact, PR already held an interest in some of the acreage it’s now acquiring. We really like that strategy because the company already has intimate knowledge of the economics of wells in these region – it’s not expanding into a new region, and it won’t face much of a learning curve in developing these wells.

The purchase price was $608 million which PR funded with cash on hand without a need to take on significant new debt – the net debt to EBITDA ratio is on course to remain below 1.0 through 2025.

PR is a high-quality, low-cost producer with a peer-leading dividend yield and low net debt.  The stock rates a buy below $16. 

We mentioned Permian Resources in our roundtable discussion earlier this month. What stayed our hand on recommending the stock was the geopolitical “spike” in oil prices that we expected to fade quickly. With oil now below its trading range from before Israel’s airstrikes on Iranian nuclear facilities, it’s time to jump in.