Prediction: If the Iran Conflict Escalates, These Energy Stocks Could Double in 2026

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

If the conflict escalates, oil prices could go much higher, taking energy stocks with them. I think Occidental Petroleum (NYSE: OXY) and Diamondback Energy (NASDAQ: FANG) could double in 2026 if there's a major escalation in the war with Iran.

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The potential to further enhance its capital structure

Shares of Occidental Petroleum are already up nearly 60% this year. The oil and gas company was on track for a stronger 2026 before oil prices surged. Occidental sold its chemicals subsidiary, OxyChem, to Berkshire Hathaway earlier this year for $9.7 billion. That provided it with cash to repay debt and achieve its targeted level. The interest expense reduction, along with other cost savings, positioned Occidental to generate more than $1.2 billion in incremental free cash flow this year with no increase in oil prices, a nearly 30% increase from last year.

With oil prices now much higher, Occidental is on pace to produce an even bigger free cash flow gusher this year. The company can use that windfall to further strengthen its much-improved balance sheet by building a bigger cash position and repaying additional debt. Occidental can also repurchase more shares. The company could also resume redeeming Berkshire's preferred equity investment, which it currently doesn't plan to restart until 2029. While a further escalation of the conflict with Iran would be bad for the global economy, it could enable Occidental Petroleum to dramatically reshape its capital structure this year, transferring meaningful value from creditors to shareholders.

Feasting on higher crude prices

Diamondback Energy has already gained roughly 35% this year. It could have a lot further to run if oil prices remain 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 necessary wells to maintain its current production rate. As a result, it can generate meaningful 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 while retaining the other half to strengthen its already rock-solid balance sheet. The longer oil prices stay high, the more cash it can produce, enabling it to more quickly achieve its targeted debt level. It can also repurchase more shares and pay variable dividends if crude prices stay high. That combination of accelerated debt reduction and higher cash returns could help drive up its share price this year.

Ample fuel to continue rising

Oil prices have already surged this year, driving up oil stocks, including 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 enable them to generate significantly more free cash flow that they can use to enhance shareholder value.

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