Last year was a relatively calm period for the oil market. Demand was healthy while OPEC kept a tight lid on its supplies, which supported prices. However, this year could be a different story. Oil market forecasters see the potential for geopolitical risks relating to Russia and Iran, which could put upward pressure on crude prices. That could give oil stocks the fuel to rally.
Most investors likely only want to hold one oil company in their portfolio. To help narrow the list, a few Fool.com contributors have compiled a list of their top oil stocks for investors to consider this year: Chevron(NYSE: CVX), ConocoPhillips(NYSE: COP), and Occidental Petroleum(NYSE: OXY). Here's a closer look at why these three stand out from their peers in the oil patch.
Chevron rides the wave like a pro
Reuben Gregg Brewer (Chevron): Oil and natural gas prices are very volatile. That's something all investors in the energy patch need to understand and, perhaps more importantly, prepare for. Integrated energy giant Chevron is a great way to prepare if you are a buy-and-hold type investor.
For starters, Chevron's integrated business model is all about diversification. Its portfolio spans the globe and extends from the upstream (oil production) through the midstream (pipelines) and all the way into the downstream (chemicals and refining). This helps soften the peaks and valleys inherent to the energy sector because each segment of the industry performs differently over time.
On top of that, Chevron has a rock-solid balance sheet with minimal leverage. The company's debt-to-equity ratio is currently a very modest 0.17. Modest leverage allows the company to take on debt during the inevitable downturns to support the business and shareholder dividends. Today, Chevron appears very well prepared for the next oil industry downturn.
The overall strength of Chevron's business approach is shown most clearly in the company's dividend history. Despite the cyclical nature of the energy sector, Chevron has increased its dividend annually for 37 consecutive years. You can't build a record like that without having a resilient business and strong business model. Add in a 4% dividend yield, and you have the kind of buy-and-hold investment that even a conservative dividend investor could love.
ConocoPhillips gets an acquisition-fueled boost
Matt DiLallo (ConocoPhillips): ConocoPhillips has compiled a treasure trove of low-cost oil and gas resources. It entered last year with a resource base of 20 billion barrels of oil equivalent (BOE) with an average cost of supply of $32 per barrel.
Because of that, the company can produce a lot of cash in the current environment where crude oil prices are in the $70s. ConocoPhillips generated $14.9 billion of cash flow from operations through the first nine months of last year, selling its production at an average of $55.77 per BOE (and $78.88 per barrel of crude oil). That gave it the money to fund capital expenditures and investments ($8.8 billion), repurchase shares ($3.5 billion), and pay dividends ($2.7 billion).
It also repaid $500 million of debt at maturity for good measure. It ended the period in excellent financial shape, with $7.1 billion of cash and short-term investments and another $1 billion of long-term investments on its balance sheet.
Since then, the oil company has enhanced its ability to produce low-cost oil and gas by closing its $22.5 billion acquisition of Marathon Oil. The deal added over 2 billion barrels of resources with an average cost of supply below $30 per barrel. ConocoPhillips expects the deal will be immediately accretive to its cash from operations and free cash flow. In addition, it expects to capture more than $1 billion of cost and capital synergies within the first year, more than double its initial projection.
The enhanced free cash flow from that Marathon deal will enable ConocoPhillips to return more cash to investors this year. It raised its dividend by 34% and is ramping up its annual share repurchase rate from $5 billion to $7 billion. This combination of earnings growth and increased cash return could give ConocoPhillips the fuel to outperform its peers in the oil patch this year.
Multiple catalysts could fuel a turnaround
Neha Chamaria(Occidental Petroleum): I'll start with a caveat: Shares of Occidental Petroleum have been under pressure for nearly three quarters now, and there's a chance the stock could fall further in the short term. That's because crude oil prices continued to fall in the fourth quarter of 2024, and that'll likely reflect in the oil and gas giant's Q4 numbers when they are announced in mid-February. Yet, if investors look beyond the headlines and focus on Occidental's debt and cash flows instead, they'll realize why this stock is a buy on dips.
Although lower oil prices hit Occidental's earnings in recent quarters, the stock also took a hit because of a sudden spurt in its debt. When Occidental acquired CrownRock for nearly $12 billion in August 2024, it funded almost 75% of its acquisition price with fresh debt.
While it's hard to predict where oil prices will go, Occidental is doing what it should right now: bringing down debt while extracting value from CrownRock assets. Occidental repaid $4 billion in debt in less than three months after the acquisition, hitting 90% of its short-term debt-reduction goal significantly ahead of target.
During Occidental's third-quarter earnings conference call, CEO Vicki Hollub predicted that the company should still be able to generate cash flows to cut debt further in 2025, even if oil prices remain low. Aside from potential divestitures, CrownRock -- which expanded Occidental's presence in the Permian and Midland basins -- should also contribute to the company's cash flows this year. That should also support higher dividends in 2025, making Occidental Petroleum one oil stock that could turn around in 2025.
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Matt DiLallo has positions in Chevron and ConocoPhillips. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
