From an investment point of view, the S&P500 it seems risky right now. A heavy concentration on certain expensive names leads more than one analyst to predict low returns for the next 10 years.

This could cause investors to turn away from the United States when looking for opportunities. But I think that’s a mistake: outside of the index, there are some stocks that I really like the look of.

An oil company

An example is Tuning Energy (NASDAQ:CHRD). Earlier this year, the company merged with Enerplus to form the largest oil producer in the Williston Basin.

My thesis here is relatively simple. Management says its assets will allow it to extract oil for 10 years at low prices and I believe this will generate strong returns for investors.

Agreements balance sheet is extremely strong. And it allows the company to return significant amounts of the cash it generates to investors in the form of dividends and share buybacks.

This sets it apart from other oil stocks and makes it very attractive from my point of view. I think this seems like a good deal, even when U.S. stocks as a whole are at historically high levels.

Production

Chord’s location in the Williston means its costs are higher than those of its Permian-based counterparts. But I think there’s still plenty to get investors excited about.

Last August, the company expected to generate about $700 million in free cash flow this year based on an oil price of $70. And from next year, this should be boosted by the synergies of the Enerplus transaction.

Since then, West Texas Intermediate (WTI) has fallen to around $67 per barrel. But the agreements market capitalization is currently less than $8 billion, which I think makes things very interesting.

At this level, investors could still enjoy a very good free cash flow yield, even if oil prices were to fall further. But there is more to the story than that.

Dividends

Instead of exploration, Chord seeks to return its available cash to shareholders. The company aims to keep its leverage ratio below 1 and sets its dividend policy based on how it achieves this.

Source: Chord Investor Presentation, August 2024

Currently, the company has a net debt/EBITDA ratio of 0.3. At this level, 75% of the free cash generated by the company is returned to investors in the form of dividends.

A positive view of WTI’s prospects is a necessary condition for investing in oil stocks. But if the price of oil stays above $70 for the next 10 years, things could be very interesting.

If I invested £1,000 today, I think there is a chance of getting 100% of that back in dividends over the next 10 years. And with interest rates falling, there aren’t many such opportunities.

An action to consider?

There are many reasons to be uncertain about the outlook for oil prices. Right now, the biggest threat is probably OPEC increasing production at a time when demand is weak.

Investors with a positive outlook for oil may want to take a look at Chord Energy. US stocks in general can be expensive, but I think they still offer excellent value.