Top 3 oil stocks to buy in May

Oil prices have surged this year. West Texas Intermediate, the main benchmark for US oil prices, has reached over $100 a barrel, up more than 35% since the start of the year. Crude oil had been even higher, hitting over $130 a barrel at the peak. Even though oil has cooled since hitting that peak, it is well above what most oil companies were expecting this year.

This is evident from their hedging strategies. Because many oil stocks are locked into prices well below current levels, they will not fully benefit from higher oil prices this year, since these contracts cap some of their gains. However, three oil stocks with almost unlimited upside potential on the upside of oil prices are Marathon oil (MRO 1.70%), Continental Resources (CLR 2.37%)and Conoco Phillips (COP 4.70%). They look like the best oil stocks to buy in May for those who believe crude prices will continue to rise.

Image source: Getty Images.

Significant leverage effect on rising commodity prices

Marathon Oil chose to limit its oil hedging activities, which allowed it to reap almost all of the profits from rising oil prices. As the following chart shows, it is among the most sensitive to improving oil prices, as it did not lock in downside commodity price hedges:

A graph showing hedge sensitivities for several US oil producers.

Image source: Marathon Oil Investor Presentation.

As a result, there’s virtually no cap on the amount of cash flow the company could carry this year. In addition, since the company had accumulated significant losses in previous years, it will not pay any cash tax on its windfall gains this year. This will allow Marathon to return a source of cash to its shareholders in 2022.

The company has already increased its dividend four times in the past year, for a total growth of 133%. It also repurchased $1 billion worth of shares from October last year to early February, reducing the number of shares outstanding by 8%. Given its nearly uncapped benefit from rising oil prices and its tax shield, Marathon could return a huge amount of cash to shareholders this year if oil prices remain high. This could give her the fuel to produce significant total yields.

More income to come

Like Marathon Oil, Continental Resources has not hedged much of its oil and gas production this year, so there are few constraints on its ability to capture higher oil prices. This allows the company to reap a huge windfall, giving it the cash flow needed to return more money to investors.

The company recently offered its investors another significant dividend increase, pushing it up 22%. It has now given investors two raises this year, continuing the steady growth since the payout was restored last year. There will likely be more dividend growth to come. Continental aims to increase its dividend yield from its current level of 1.8% to over 2% over the 2022-2025 period.

In addition to increasing the dividend, Continental Resources wants to buy back a significant portion of its outstanding shares. He intends to spend an additional $1 billion on stock buybacks. This is enough to withdraw 30% of its current publicly traded float.

Meanwhile, as oil prices rise, its cash flow will continue to increase, giving it more money to allocate on behalf of shareholders. He could use that money to pull out even more shares or make acquisitions as interesting opportunities arise.

Three ways to profit from rising oil prices

ConocoPhillips is not using hedges, which is paying massive dividends this year as the US oil giant has unlimited upside in rising oil prices. This allows him to generate a burst of free cash flow, of which he plans to return a significant percentage to investors.

The company initially set a goal of returning $7 billion to investors in 2022 on the following three levels of capital return:

  • Pay a fixed quarterly dividend ($2.4 billion per year) that it aims to increase each year.
  • Buy back at least $3.5 billion in stock.
  • Make Variable Return Cash (VROC) payments of approximately $1 billion.

However, thanks to rising oil prices, ConocoPhillips has already increased its return target. It added $1 billion to the last two levels, allowing it to accelerate its buyback pace and increase its VROC payout from $0.20 to $0.30 per share. Given its uncapped upside to higher oil prices, ConocoPhillips could continue to allocate more money to both of these levels while offering investors a significant increase in the quarterly dividend later this year. These rising cash yields make it look like a the best oil stock to buy right now.

Ready to take advantage of rising crude prices

While all oil stocks benefit from higher oil prices, Marathon, Continental and ConocoPhillips have more leverage on crude prices due to their hedging strategies. This trio is therefore ready to take advantage of the increase in oil prices this year. All three aim to return a growing share of that windfall to shareholders, making them stand out as the top oil stocks to buy in May to bet on oil prices remaining in the triple digits this year.


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Felix J. Dixon