Top 3 oil stocks to buy as crude nears $ 100 a barrel
Oprices have skyrocketed this year. WTI, the main benchmark price for U.S. oil, rose about 75% in 2021, recently closing at around $ 83 a barrel. Oil market watchers believe crude prices may continue to rise as the economy accelerates at a time when major producers are still dragging supplies.
As crude oil nears $ 100 a barrel, we asked some of our energy contributors for their favorite oil stocks. Here is why they think ConocoPhillips (NYSE: COP), Devon Energy (NYSE: DVN), and EOG Resources (NYSE: EOG) are best positioned to profit as crude oil prices approach $ 100 a barrel.
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Take advantage of the crisis to get better
Reuben Gregg Brewer (ConocoPhillips): About a decade ago, ConocoPhillips divested its downstream refining operations in order to be able to focus on its exploration and production operations. In 2016, during a downturn in the energy sector, it reduced its dividend. But this reset appears to have positioned the driller well, as he was in fact able to increase his dividend throughout the oil slowdown caused by the 2020 pandemic.
Better yet, it was able to take advantage of the recession to acquire assets opportunistically, including buying assets from Concho Resources and the Permian Basin at Royal Dutch Shell. These measures position it as a better company today than it was before the recession. Notably, the oil driller expects to be able to increase production, on average, by about 3% per year over the next decade and generate $ 80 billion in cash flow over the period. In addition, it estimates that it is able to achieve a rate of return on capital employed of 20%, compared to 17% before recent acquisitions. These are all strong numbers.
The result here is that ConocoPhillips is now positioned to profit even more from the price hike. Certainly, if oil drops, society will feel the effects more than a diversified integrated oil major. However, if you have a firm belief that oil prices are heading towards $ 100 a barrel, this targeted exploration and production name should be on your shortlist. You’ll also be able to collect a 2.4% dividend yield along the way, although that in and of itself is probably not a good enough reason to buy ConocoPhillips.
As oil prices rise, dividends on this stock are expected to
Neha Chamaria (Devon Energy): Investors in certain oil stocks have not been as successful in years. Not only do some of the biggest oil producers make a lot of money from rising oil prices, they also return a lot of it to shareholders in the form of big dividends. This means that if an oil stock has indexed its dividends to oil prices, you could be pocketing a lot more money if oil prices hit $ 100 a barrel. This is exactly what Devon Energy investors can expect to see, thanks to the company’s new fixed and variable hybrid dividend policy instituted earlier this year.
Under its new policy, Devon’s quarterly dividend consists of two components: a fixed payment of $ 0.11 per share and a variable dividend of up to 50% of its additional cash flow (or just 50% of the remaining cash flow). after financing its capital and dividend expenses and taking into account one-off charges such as restructuring).
Devon previously gave a glimpse of what to expect last quarter when he declared a quarterly dividend of $ 0.49 per share, comprising a fixed dividend of $ 0.11 per share and a variable dividend of 0, $ 38 per share as the company’s free cash flow almost six-fold sequentially.
As higher oil prices are expected to mean higher cash flow for Devon, you can bet on bigger quarterly dividends from the 1% yield stock. Here’s the best part: Devon has a habit of increasing its dividend steadily over the years, growing it at a compound annual rate of around 10% since 1993. With a strong balance sheet to boot, Devon Energy is a hell of a stock. of oil dividends. play the rally in oil prices.
Positioned to profit from rising oil prices
Matt DiLallo (EOG Resources): EOG Resources has one of the cheapest oil companies in the United States. The company can generate enough cash flow to maintain its current production rate as long as WTI averages $ 30 per barrel. Meanwhile, it only needs WTI at $ 36 a barrel to cover its 1.8% –productive dividend. Because of this, it produces excess cash flow at the current price of $ 80 + WTI.
EOG generated $ 2.1 billion in free cash flow in the first half of the year after hedging its core investment program. This gave him the funds to pay his regular dividend, in the amount of $ 600 million. special dividend, pay off a bond maturity of $ 750 million and invest $ 500 million in additional capital projects. Meanwhile, he ended this period with $ 3.9 billion in cash on his balance sheet.
EOG has estimated it could produce an additional $ 2.3 billion in free cash in the second half of the year if oil averages $ 65 a barrel. With crude well above that level, EOG is on track to significantly exceed that number.
The company plans to prioritize returning its growing cash flow to shareholders. It could do so by paying additional special dividends and, opportunistically, share buyback.
EOG’s low-priced oil business has liquidity as crude oil prices approach $ 100. Instead of using that money to drill more wells, which would increase supply and potentially impact oil prices, he intends to return most of this growing spurt to investors. This makes it a great option for investors looking for a way to profit from rapidly rising crude oil prices.
10 stocks we prefer at ConocoPhillips
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Matthew DiLallo owns shares of ConocoPhillips. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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