Oil Prices Are Falling, But These 3 Energy Stocks Are Still Good Buys
In recent weeks, crude oil prices have soared from their already high levels due to Russia’s invasion of Ukraine. West Texas Intermediate (WTI) crude, the main U.S. benchmark, rose above $130 a barrel at its March peak due to supply issues. Oil prices have cooled since then, with WTI trading below $100 a barrel for much of the past week.
Even so, oil companies are still cashing in at current levels, and they could make big money for their shareholders if oil prices stay high. Three oil stocks that still look like particularly good buys for some of our energy sector contributors right now are TotalEnergies ( TTE -0.46% ), ExxonMobil (XOM -0.39% )and Conoco Phillips ( COP 0.78% ).
Diversify from its core businesses
Reuben Gregg Brewer (Total Energies): Oil prices go up and down, often dramatically. So the current volatility, while driven by scary geopolitical events, is not out of the norm. This is why more conservative investors should stick to integrated energy giants like France’s TotalEnergies. Its activity covers the entire world and extends from upstream (drilling) to downstream (refining and chemicals). It’s built to ride the often choppy seas of industry.
However, beyond that, TotalEnergies is doing a little something more that could prove just as important for its future. It is beginning to move into the “electron” sector, with investments in solar, wind and power assets. Basically, management sees ESG written on the wall, and they’re using funds from their hydrocarbon business to create a new clean energy division. It is prepared for the here and now, and is increasingly prepared for an energy future in which oil and natural gas are not as important. This transition is likely to take a long time, so there is no rush, but TotalEnergies is at the forefront of the industry in solving the carbon emissions problem.
Investors, meanwhile, can collect a generous dividend that returns 6.1% off the current share price while they sit back and let management adjust to the changing energy landscape. It is the most generous payment among the oil majors. That said, TotalEnergies is a French company, so foreign taxes will be withheld from any dividends you receive, but you can recover them when you file your annual US taxes. If you are looking for an oil play designed for today and tomorrow, this high yielding stock could be a great option for you.
Strong shareholder return potential even if oil plunges another 30%
Neha Chamaria (ExxonMobil): ExxonMobil is one of the largest fully integrated oil companies in the world, and that’s just one of the main reasons why it belongs in your portfolio. Oil exploration and production companies – the upstream segment – will benefit the most from higher oil prices, which increases their margins on what they extract. Of course, the reverse situation holds true when oil prices fall, which makes an integrated player like Exxon so attractive.
ExxonMobil’s business spans the entire value chain, from upstream (mining) to downstream (refining and petrochemical production), and also markets refined products to consumers. So no matter where oil prices are, parts of ExxonMobil’s business are almost always up for grabs.
It also helps that this massive company makes good use of high oil price environments to strengthen its financial position in a way that positions it to weather the tough times – and continue to reward shareholders through them. This helps explain how ExxonMobil was able to increase its dividend payouts for 39 consecutive years.
Right now, this oil major looks poised to generate huge cash flow, and a lot of that money should end up in the pockets of shareholders. Even at a Brent crude oil price of $60 a barrel, ExxonMobil expects its annual cash flow from operations to more than double by 2027 from its 2019 level. In short, shareholders of ExxonMobil don’t have to worry much about oil price volatility right now. Even in the worst-case scenario, you can at least count on it to pay you a regular dividend, and that’s reason enough to consider this 4.1% yielding oil aristocrat.
A huge source of cash flow is still to come
Matt DiLallo (Conoco Phillips): Oil giant ConocoPhillips struck two major deals last year to strengthen its position in the resource-rich Permian Basin. It completed its $9.7 billion merger with Concho Resources in January and acquired Shellassets in this region for 9.5 billion dollars in December. These transactions increased its scale, helped it reduce costs and positioned it to generate greater cash flow at lower oil prices.
As a result, ConocoPhillips estimates it can produce a cumulative cash flow of $165 billion from its operations through 2031, assuming oil averages $50 a barrel. That would give it enough money to grow production at a compound annual rate of 3% while returning about $75 billion to investors through dividends and share buybacks. The company noted that it could generate an additional $35 billion in operating cash flow for every $10 change in average oil prices over that 10-year period.
So while crude prices have cooled off a bit recently, ConocoPhillips is still on track to generate a huge source of free cash flow in the years to come if prices stay within their current range. The company already plans to return $8 billion in cash to investors this year through its quarterly dividends, stock buyback program and variable-return cash (VROC) distributions. ConocoPhillips has already increased its VROC payment by 50% from its original estimate due to high oil prices. It could shell out even more money in the coming quarters as oil remains well above its budgeted level. Meanwhile, with oil prices moving away from their recent highs, ConocoPhillips shares have plunged from their highs, which is helpful for a company that plans to buy back at least $3.5 billion of its shares. This year.
Put it all together and ConocoPhillips could produce significant returns for investors in the years to come.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.