3 oil stocks to buy as crude oil prices near $ 100

Bank of America recently made a bold prediction. The banking giant estimates that supply and demand imbalances in the oil market will push crude prices up to $ 100 a barrel by next year. The bank is not alone – big oil executives also believe oil prices could surpass $ 100 a barrel as the global economy comes to life amid tight supplies.

This scenario would undoubtedly be a boon to oil stocks. With that in mind, we asked some of our energy contributors which oil stocks they think are the best buys as oil prices are heading into the triple digits. Here is why they think Western Oil (NYSE: OXY), Marathon Oil (NYSE: MRO), and Devon Energy (NYSE: DVN) have one of the best triple-digit oil upside potentials.

Image source: Getty Images.

A double boost

Reuben Gregg Brewer (Western Oil): I wouldn’t characterize Occidental Petroleum as a buy-and-hold type of energy stocks, given the self-inflicted wounds it suffered during the 2020 oil crisis. Indeed, the battle to buy out Anadarko Petroleum she won Chevron (NYSE: CVX) bordered on the side of pride. And that has left society ill-prepared for the drop in demand and prices for oil brought on by the pandemic.

And yet, as oil rebounds, with some suggesting that $ 100 a barrel is a real possibility, more aggressive investors looking for a way to play such a move in commodities might still be interested. There are two reasons for this. First, as an oil driller, Occidental Petroleum will clearly benefit from a sharp rise in this key commodity. But the main reason is that such an increase will make it easier for management to deal with the lingering impacts of the Anadarko deal, including its still heavily leveraged balance sheet.

OXY debt-to-equity ratio chart

OXY debt-to-equity ratio data by YCharts

So there is the direct benefit here in terms of turnover and bottom line (which all energy companies are likely to see) and the follow-up effect of an improvement in the financial structure. Either alone would likely get investors excited, but the two together could lead to a complete reassessment of the company’s future – for the better this time around. Anadarko’s misstep should probably keep conservative investors away, but the more aggressive guys might see the Westerner, warts, and everything in between, as a leveraged bet.

Hit billions of dollars

Neha Chamaria (marathon oil): Raw material prices are not only the engine of Marathon Oil’s revenue and cash flow, but they are also the most important deciding factor behind the company’s capital expenditure and capital allocation plans, that’s why the ongoing rise in crude oil prices is great news for Marathon Oil. It’s important to note that crude is hitting two-year highs as of this writing, but Marathon Oil stock is still trading below its 2019 level.

Consider this: Marathon expects to generate free cash flow (FCF) worth $ 1.1 billion this year at an average WTI crude price of $ 50 a barrel. At $ 60 a barrel, the company could generate up to $ 1.6 billion in FCF! With crude having already passed $ 70 a barrel at the time of writing, Marathon should therefore be able to generate even higher cash flow and use the extra cash to pay off more debt and reward shareholders. with higher yields. By the end of the first quarter, Marathon had already paid off $ 500 million in debt and was aiming for further debt reduction of $ 500 million this year. It also increased its quarterly dividend by 33% in the first quarter.

In fact, a higher oil price environment should allow Marathon to experience solid growth for years to come, given that it could generate nearly 5 billion FCF over the next five years at an average price of fuel. crude of only $ 50 a barrel. And it’s not just oil prices. While tailoring production to market conditions, the company is also tightening its cost control and aims to reduce its combined production and general and administrative expenses by almost 30% this year from 2019 levels. Management prioritizing dividends and debt reduction, Marathon shareholders have a lot to look forward to as oil continues to rise.

Monster dividend stock as oil prices continue to rise

Matt DiLallo (Devon Energy): Investors in Devon Energy are reaping immediate dividends as oil prices rise thanks to its unique variable dividend framework. The oil and gas producer plans to pay up to half of the excess cash it generates each quarter to investors via a variable dividend. As oil prices rise, this payment also increases.

The company paid its first variable dividend last March based on its fourth quarter cash flow. It distributed 50% of its excess cash, which amounted to $ 0.19 per share. That was almost double its fixed quarterly dividend of $ 0.11 per share. The company will make its next variable payment at the end of this month. Although it only pays out 48% of its excess cash this quarter, at $ 0.23 per share, it is 13% higher than the previous quarter’s rate and more than double its base quarterly rate. This increase was due to improving oil prices, which fell from an average of $ 42.65 per barrel in the fourth quarter to $ 57.87 in the first quarter.

With oil prices continuing to rise – they’re close to $ 75 a barrel right now – Devon’s variable dividend payments are expected to rise further. If oil hits triple digits again, Devon could pay a monster variable dividend. This potential windfall in cash payments makes Devon an oil stock investors won’t want to miss as oil prices rush towards $ 100.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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Felix J. Dixon