Prediction: If the conflict with Iran escalates, these energy reserves could double by 2026

The conflict with Iran has already driven up oil prices. Brent, the global benchmark, has risen more than 70% this year to surpass $100 a barrel. That has fueled a big rally in energy stocks. For example, the average energy stock in the S&P 500 This year it has already increased by approximately 40%.

If the conflict escalates, oil prices could go much highertaking energy reserves with them. Believe Western Oil (NYSE: OXY) and Diamond Back Energy (NASDAQ: FANG) could double in 2026 if there is a major escalation in the war with Iran.

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Occidental Petroleum shares are already up almost 60% this year. The oil and gas company was on track for a stronger 2026 before oil prices rose. Occidental sold its chemical subsidiary, OxyChem, to Berkshire Hathaway earlier this year for $9.7 billion. That provided him with cash to pay down debt and reach the target level. The reduction in interest expense, along with other cost savings, positioned Occidental to generate more than $1.2 billion in incremental free cash flow this year without an increase in oil prices, an increase of nearly 30% over last year.

Now that oil prices are much higher, Occidental is on track to produce even more free cash flow this year. The company can use that windfall to further strengthen its much-improved balance sheet by creating a larger cash position and paying down additional debt. Occidental may also buy back more shares. The company could also resume bailing out Berkshire’s preferred equity investment, which is currently not planned to restart until 2029. While further escalation of the conflict with Iran would be detrimental to the global economy, it could allow Occidental Petroleum to dramatically reshape its capital structure this year, transferring significant value from creditors to shareholders.

Diamondback Energy has already gained about 35% this year. It could have a ways to go if oil prices stay high.

The oil and gas company has low-cost operations. It only needs crude to average $30 a barrel to generate enough cash to drill the wells needed to maintain its current production rate. As a result, it can generate significant free cash flow at higher prices. At $50 oil, it can produce over $3.1 billion in free cash, and at $80 oil, over $6.7 billion.

Diamondback Energy plans to return at least 50% of its free cash flow to investors and retain the other half to strengthen its already strong balance sheet. The longer oil prices stay high, the more cash it can produce, allowing it to reach its target debt level more quickly. It can also buy back more shares and pay variable dividends if crude oil prices remain high. That combination of accelerated debt reduction and higher cash returns could help boost its stock price this year.

Oil prices have already skyrocketed this year, increasing oil reservesincluding Occidental Petroleum and Diamondback Energy. I think both have the potential to double in 2026 if the conflict in Iran worsens, which would likely keep oil prices higher for longer. It would allow them to generate significantly more free cash flow that they could use to enhance shareholder value.

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Matt DiLallo has positions at Berkshire Hathaway. The Motley Fool has posts and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

Prediction: If the conflict with Iran escalates, these energy reserves could double by 2026 originally published by The Motley Fool