5 oil stocks close to profiting from $ 50 crude oil

Oil prices have started 2021 on a high note, rallying nearly 8% in the first week of the year, thanks to unexpected additional support from Saudi Arabia. This pushed crude above $ 50 a barrel for the first time since last February. While all oil companies will benefit from the rise in oil prices, some will produce a burst of cash if crude maintains its current level above $ 50 a barrel. Here is a look at five oil stocks which could prosper this year if oil stays above this crucial price.

The deal will pay even more dividends

ConocoPhillips (NYSE: COP) agreed to buy his rival Concho Resources (NYSE: CXO) in an all-stock deal valued at $ 9.7 billion in October. The main driver is that the combined company can reduce costs, allowing it to generate more cash at lower oil prices. For example, at $ 40 of oil, ConocoPhillips / Concho can produce a combined operating cash flow of $ 7.5 billion to $ 7.8 billion. That’s enough money to fund the capital needed to maintain their current production level and Conoco’s 3.8% dividend with room to spare. At $ 50 worth of oil, the combined company can produce an additional $ 3 billion in cash. He could use that money to restart his growth engine by drilling more wells to increase production and return more money to shareholders through share buybacks and special dividends.

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A wave of dividends could be ahead

Devon Energy (NYSE: DVN) recently completed its merger with WPX Energy. This deal also cut its costs so that it could run just fine at $ 40 worth of oil. It could produce enough cash to maintain production and its base dividend which is currently earning 2.4% at this price point with room to spare. Devon Energy plans to use any free cash flow it generates at higher oil prices to improve its financial strength and pay a variable dividend. At $ 50 worth of oil, the company could generate up to $ 1.5 billion in free cash. Devon has said he could return up to 50% of his excess cash to investors via special dividends, implying the potential for a monster payout this year.

Flexibility to flourish

EOG Resources (NYSE: EOG) only needs $ 36 a barrel of oil on average this year to maintain its current production rate and a 2.5% dividend. With oil prices well above this benchmark, it is on track to generate free cash flow. It could use those funds to pay down debt, buy back stocks, increase its dividend, or restart its growth engine. To put his options into perspective, even if he increased his drilling activity to increase production by 8% to 10%, it would still produce over $ 2 billion in cash available at $ 50 + worth of oil. This gives it a lot of flexibility to improve its balance sheet and return more money to investors.

Significant special dividend potential

Pioneer of natural resources (NYSE: PXD), like Devon and ConocoPhillips, merges with a counterpart to reduce costs. The combined company estimates that it can generate enough cash at an oil price of around $ 30 to maintain its 1.7% dividend and current production pace. He’s on track to produce a huge amount of free cash if oil stays in the $ 50 range this year, and he plans to use those funds to reduce debt and follow Devon in adopting a variable dividend framework. These special payments could significantly exceed its current base dividend.

Ready to become truly shareholder friendly in 2021

Marathon Oil (NYSE: MRO) plans to be very disciplined in 2021. At $ 40- $ 45 of oil, it plans to reinvest up to 80% of its cash flow to maintain production and use the remaining 20% ​​to improve its balance sheet and support its dividend recently restored base which currently gives 1.6%. Above this level, the company intends to allocate at least 30% of its cash flow to improving its financial profile and to shareholder-friendly activities, such as share buybacks and redemptions. special dividends. With crude oil currently in the $ 50 range, Marathon Oil could be very shareholder-friendly this year.

If oil prices hold, 2021 could be a very good year for oil stocks

Oil companies have spent the past few months focusing on cutting costs, in part due to a wave of mergers. As a result, most are on track to generate enough cash at $ 40 of oil to maintain their current production rates and dividends with room to spare, meaning they can produce a flurry of free cash. to $ 50 of oil. While some could use it to boost production, most plan to return this windfall to shareholders through share buybacks and special dividends, which could greatly reward their investors in 2021.

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