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All Contents © 2017The Kiplinger Washington Editors
By Aaron Levitt
| February 2017
CellsDeDells via Wikimedia
Oil stocks are riding high so far in 2017. After spending much of 2016 in the proverbial toilet, the tail end of the year was met with better times. The reason? Some big-time production cuts.
Oil cartel OPEC, as well as other major non-OPEC member nations, agreed to cut production by almost 1.8 million barrels per day during the first half of 2017.
Those cuts to oil output were designed to reduce the global glut of crude oil and ultimately boost prices. And so far, they seem to be working. Since the end of 2016, oil prices have steadily risen and now sit at nearly $54 per barrel. A mark that hasn’t been reached in roughly a year.
For the various oil stocks, this has been great news. After all, when your profits are directly tied to the price of the commodity, the higher the natural resources selling price, the higher your profits go. And with oil now above $50 per barrel, the oil stocks should see their profits finally start to rise meaningfully.
And that makes them big-time buys for the new year.
But which ones should you buy? Here are ten of the best oil stocks to buy today.
Prices and data are from the original InvestorPlace story published on February 17, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
When it comes to the integrated majors, Exxon Mobil Corporation (XOM) is often the go-to name. However, the real winner with regards to higher crude oil prices is slightly smaller rival Chevron Corporation (CVX). It’s probably the best of the biggest oil stocks out there.
CVX is more of an oil stock than its crosstown rival. While Chevron has moved heavily into natural gas production and LNG assets, the name of the game is still pumping out tons of crude oil. The vast
majority of its output is still very tied to fuel. XOM is all about that natural gas. So, CVX has the most to gain of the U.S. majors when it comes to rising prices.
But don’t take my word for it. Chevron basically said so.
According to an investor presentation from last September, CVX stated that at $52 per barrel, Chevron is now cash flow positive. That means its crude oil operations produce enough cash to keep the dividend and CAPEX spending going. At $60 per barrel, CVX starts to make money from its operations and at $70 per barrel, more than $25 per barrel is pure, sweet profits.
With crude now above $50, CVX is going to have a very sweet 2017 indeed. So will investors if they bet on the king of the oil stocks.
Talk about bad timing. ConocoPhillips’s (COP) decision to become a pure E&P firm and spin out its refining arm came just as the market was peaking. Unfortunately, with no downstream to help buffer the effects of lower crude oil prices, COP suffered hard. So bad, it even had to cut its lucrative dividend.
But now could be the time to prove that the spin off was the right decision.
Conoco has continued to sell natural gas and higher cost oil operations to focus on the best drilling locations. This “lean and mean” profile has allowed it survive and trudge through the current operating environment. Perhaps more importantly, it reduces COP’s breakeven point to around $50 per barrel.
Like previously mentioned CVX, that $50 per barrel mark allows COP to once again fund its CAPEX programs and start raising its dividend. Management has even talked about restarting its once lucrative buyback program.
In the end, high crude oil prices will directly benefit COP and return it to its former glory.
As one of the largest independent crude oil stocks, higher oil prices are a boon for Anadarko Petroleum Corporation (APC). That’s because Anadarko has continued to double down in its main hunting ground of the Gulf of Mexico.
APC is a huge player in the Gulf and it has a vast network of legacy wells that continue to pump out crude oil. Across its 1.3 million leased acres and 269 drilling blocks, APC pumps out over 160,000 barrels of crude per day from the Gulf. But what is really exciting is its newer and unconventional assets in the critical waterway.
Anadarko has hit pay dirt on a bunch of new finds in the Gulf. Some such as its Lucius and Heidelberg fields are incredibly lucrative and rich. Even better was that APC was able to snag additional drilling blocks in these fields from struggling Freeport-McMoRan Inc’s (FCX). These were basically bolt-ons that helped support APC’s cash flows instantly.
Higher oil prices simply make more expensive offshore drilling a better bet and APC one of the better oil stocks to buy.
Tony Webster via Flickr
Magellan Midstream Partners, L.P. (MMP) doesn’t produce crude oil. But it moves it around. A lot of it; and that makes it one of the best oil stock to buy.
MMP is a pipeline firm that has pretty much solely focused on crude oil. Its vast network of infrastructure allows refiners to move their product to the market and more than 50% of all refineries in the country have the ability to tap into its 9,700-mile system.
At the same time, it operates one of the main crude oil pipelines leading in from the mid-continent to the Cushing storage facility. The majority of its system realizes steady, fee-based cash flows.
And with oil prices rising, more of those flows could be coming MMP’s way as production increases.
Even without any crude oil bumps, MMP has been a great master limited partnership to own. Magellan is one of the most conservatively run MLPs in the business and never got into any trouble during the downturn like some of its rivals.
The proof is in the cash flows and the 551% dividend increase since its IPO about a decade ago. Those quarterly increases should keep up as crude oil rises.
One of the best oil stocks to buy was knocking on death’s door just a year ago. Now Marathon Oil Corporation (MRO) could be a huge buy.
Like the previously mentioned ConocoPhillips, Marathon spun off its refining operations at just the wrong time. And like COP, MRO went heavy into shale production. The problem is that Marathon didn’t exactly pick the best average or worry about cost. That eventually came back to bite them hard.
However, with oil now rising, MRO is having a better time.
The firm’s latest earnings show that losses are starting to abate. Marathon Oil still lost money — 11 cents per share on an adjusted basis. But that was much less than the 20 cents per share that analysts had been expecting. The win came down to lower costs of production as well as higher oil prices.
With oil now continuing to rise, MRO should have an easier time turning those losses into profits. And considering investors went crazy for a smaller loss per share, imagine what happens when MRO finally starts making money again. And with oil above $50, that starts to happen.
A few years ago, Hess Corp. (HES) came under fire from a few activist hedge funds. The claim was that the mini-integrated and HES wasn’t doing enough to spur shareholder returns. During the next few years, Hess transformed itself. Out went the iconic white & green Hess trucks and in went a hefty dose of shale.
The result is that HES is one heck of an oil stock now.
The firm is a huge producer of oily, low-cost Bakken shale as well as one of the largest players in the Gulf of Mexico. The bulk of its production now comes from crude oil. That includes a hefty dose of conventional legacy assets that just pump-out barrels left and right.
And Hess continues to transform itself further. The firm has plans to tweak its portfolio further so that it has approximately 50% unconventionals, 50% conventionals with that production being 50% onshore, 50% offshore, 50% located in the United States and 50% international holdings.
If Hess can do that, it’ll be a perfect “best of both worlds” play on rising oil prices.
In the meantime, HES stock should do just fine with the current increase in prices.
Mustang Joe via Flickr
You know which oil stocks really benefit from higher oil prices? Canadian ones. Western Canadian Select benchmarked crude oil trades at a massive discount to American-produced West Texas Intermediate and global standard Brent. As a result, Canadian oil producers have had a rough time making any money for the production.
Tar sands giant Suncor Energy Inc. (SU) has avoided much of the issues, thanks in part to its huge refining network. But as one of the largest producers of bitumen, a slightly higher crude oil price would do it wonders and bring some real balance to its earnings.
And that balance is already coming.
SU’s pop in fourth-quarter earnings was driven by the higher price for WCS crude oil. The firm managed to see a meaningful increase in production as well and reduce its costs all the way down to just $25 per barrel.
With the increase in crude prices, SU is producing a copious amount of cash flows. So much so, that it raised its dividend by 3 cents as well. Suncor now yields 3%.
Antandrus via Wikimedia
Like many energy stocks, mini-major Occidental Petroleum Corporation (OXY) has struggled under the weight of lower oil prices. Shares of OXY have been basically flat over the last year or so. What has kept it afloat has been its vast higher-margined chemical operations that were able to feast on lower crude oil prices.
But with higher oil prices, Occidental should be back in the saddle once again.
OXY’s production takes place in some of the cheapest places on the planet. In the U.S., OXY is a huge producer in the low-cost Permian. The region continues to feature some of the best well mechanics around.
Overseas, Occidental has some major legacy assets in Qatar, Oman and the United Arab Emirates. These fields feature cheap production profiles and mega-reserves. The combination of the two creates a very low cost of output profile for the firm and allows it to score big when oil rises.
As for those refining assets, the high-value chemicals that it produces are less sensitive to higher oil prices as they are more specialized and feature higher margins than cracking gasoline.
In the end, OXY could be one of the best oil stocks around.
Daniel Foster via Flickr
Back in the early 2000’s, Continental Resources, Inc. (CLR) as one of the first oil stocks to jump into the Bakken. That first-mover status has allowed it build up some of the most impressive acreage and reserve positions out of any other operator in the region.
As a result, it has become one of the biggest producers in the area. It estimates that around 60% of its 2017 production will be from oil.
However, the oil downturn did hinder CLR’s overall cash flows, profits, among other things.
With that in mind, Continental underwent a massive CAPEX and cost reducing plan. The benefits of that program are now known. For 2017, CLR estimates that at $55 per barrel it’ll be cost neutral and at
$60 per barrel, it’ll be able to generate approximately $200 million in additional cash. With oil creeping higher to that $55-mark, CLR is in a great position to start making some serious money off its rising production.
Overall, Continental Resources makes for a great play on higher crude oil, as it is the top dog in the Bakken.
SkyTruth via Flickr
Perhaps the best way to play oil’s rise is by owning them all. And while there isn’t a specific “oil stocks” exchange-traded fund that only focuses on crude oil producers, the iShares U.S. Oil & Gas Exploration & Production ETF (IEO) comes pretty darn close.
IEO tracks the Dow Jones U.S. Select Oil Exploration & Production Index. Roughly 75% of the ETF’s holdings are in energy producers, and a quick study of top holdings of the IEO show a very oily ETF indeed.
Top holding COP makes up around 10.5% of the fund alone. Other top holdings include Anadarko and shale oil superstar EOG Resources Inc (EOG). IEO and its 50-plus different stocks are very much driven by the price of crude oil.
This helps explain why IEO has gained nearly 31% over the last year. The ETF and its holdings have the most to gain from the pop in crude oil.
As for expenses, IEO isn’t the cheapest option in the iShares line-up, but it isn’t expensive by any means. With total expenses coming in at 0.44% or $44 per $10,000 invested, IEO is an excellent way to buy a broad basket of oil stocks.
This article is by Aaron Levitt of InvestorPlace. As of this writing he was long MMP.
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