In the event of having a solitary oil stock investment opportunity in 2025, these leading choices should be given thought:
In recent times, the oil market has seen a relatively calm period. Demand remained strong, and OPEC maintained a strict supply policy, keeping prices steady. However, things might change this year. Forecasters are warning about potential geopolitical risks associated with Russia and Iran, which could potentially jack up crude prices even further. This unrest might just be what the doctor ordered for oil stocks, sparking a rally.
When it comes to investing in oil companies, most individuals prefer limiting their portfolio to a single pick. To help out, a few writers from Fool.com have compiled a list of their top three oil stocks worth considering in 2023: Chevron (CVX), ConocoPhillips (COP), and Occidental Petroleum (OXY). Let's delve deeper into why these three stand out from their competitors within the oil industry.
Chevron: Embracing Volatility
Oil and natural gas prices are prone to wild swings. As an astute buy-and-hold investor, you should be prepared for this volatility. Chevron excels at this, boasting an integrated business model that spans across the globe – from upstream (oil production) to midstream (pipelines) and all the way down to the downstream (chemicals and refining). This diversified approach helps buffer the market’s ups and downs, as each segment performs differently over time.
Chevron boasts a rock-solid balance sheet with minimal debt. Its debt-to-equity ratio is an impressively modest 0.17. This is essential for weathering downturns in the industry, allowing the company to take on debt and keep supporting the business and shareholder dividends. In fact, Chevron has increased its dividend annually for 37 consecutive years – a testament to its resilient business model. To top it off, it delivers a 4% dividend yield, a buy-and-hold favorite even for the most conservative of investors.
ConocoPhillips: On a Roll After Merger
ConocoPhillips possesses an impressive collection of low-cost oil and gas resources, commencing 2022 with a resource base of 20 billion barrels of oil equivalent (BOE) at an average cost of $32 per barrel. With crude oil prices in the $70s, this full-service exploration and production company can produce considerable cash flows.
ConocoPhillips' financial strength shines, as evidenced by its $7.1 billion cash and short-term investments balance at the end of 2021 – just one of many indicators that it is well-equipped to weather the current market climate.
In late 2022, ConocoPhillips bolstered its operations by acquiring Marathon Oil for $22.5 billion. This transaction added over 2 billion BOE to ConocoPhillips' resource base with an average cost of supply below $30 per barrel. ConocoPhillips anticipates immediate accretion to its cash flow from operations and free cash flow, alongside over $1 billion in cost and capital synergies within the first year.
ConocoPhillips’ increased free cash flow, generated by this acquisition, ensures higher returns for investors in 2023. The company has announced a 34% dividend hike and is ramping up its annual share repurchase rate from $5 billion to $7 billion. This perfect blend of growth and dividends could help ConocoPhillips surpass its rivals in the oil market in 2023.
Occidental Petroleum: A Turnaround in the Making
Occidental Petroleum saw its stock value plummet in the latter part of 2023, due to a steep drop in oil prices. Likewise, the stock has been under pressure due to the company’s sudden surge in debt. Its acquisition of CrownRock for nearly $12 billion was primarily funded with fresh debt.
Despite these setbacks, the company is proactively addressing these concerns by bringing down its debt and extracting value from CrownRock assets. Occidental has already managed to repay $4 billion in debt just three months after the acquisition, more than achieving its short-term debt-reduction goal ahead of schedule.
While it is challenging to predict oil price fluctuations, Occidental is vigorously working towards reducing its debt level while maximizing its cash flows. Management anticipates being able to continue generating cash flows for debt reduction, even if oil prices remain low.
Aside from potential asset divestitures and the contribution of CrownRock assets, Occidental Petroleum could be a buy on dips in 2023.
- With the potential volatility in the oil market due to geopolitical risks, investors might consider diversifying their portfolio by investing in companies like Chevron, which has a stable balance sheet and a history of increasing dividends.
- To take advantage of potential market fluctuations, some investors might consider adding ConocoPhillips to their portfolio, especially after its merger and anticipated increase in free cash flow, which could lead to higher dividends and share buybacks.
