The year has been historic for oil prices, with WTI oil trading in negative territory during the novel coronavirus driven meltdown. However, after the historic plunge, oil and oil stocks have recovered gradually.
Moreover, even as the world moves towards alternative energy sources, the demand for oil is likely to grow in the coming decades. With per capital consumption of oil still low in China and India as compared to the developed world, there is demand visibility.
Therefore, it makes sense to consider exposure to some quality oil stocks that can deliver long-term returns.
In turn, I will discuss four oil stocks that look attractive at their current price levels. They are:
So, with all of that in mind now, let’s dive into some oil stocks.
Oil Stocks to Buy for the Long Term: Marathon Oil (MRO)
Among the relatively smaller names in the industry, I like MRO stock. Sure, the stock has declined by 56.2% year-to-date. However, I believe that downside is limited from current levels and the upside potential is significant.
From a balance sheet perspective, Marathon Oil reported total liquidity of $3.8 billion for the first quarter of 2020. With a capital spending budget of $1.3 billion for the current year, the company is fully financed for the year and potentially for the next year.
Looking at the assets, Eagle Ford and Bakken are potential cash flow game changers once oil trends higher. Additionally, it’s worth noting that for the second half of the year, 95% of the capital allocation is towards these two asset plays.
Moreover, Marathon Oil is also attractive because of sustained reduction in the cost structure. In fact, the company expects to have total cash cost savings of approximately $260 million during FY2020. And as the cost reduction initiatives continue, Marathon Oil is well-positioned to survive in a relatively low oil price scenario.
Overall, Marathon Oil is among the companies that can survive the current headwinds and grow in the long-term. And after a big decline so far this year, MRO stock is worth holding in your portfolio.
Chevron Corporation (CVX)
After a sharp decline during the market meltdown this year, CVX stock has bounced back strongly. That said, the reason for the rebound is strong fundamentals coupled with attractive long-term assets. So as oil gradually trends higher, it’s a good time to consider CVX stock for the long-term portfolio.
In challenging times, balance sheet fundamentals remain the key factor. Chevron Corporation is well-positioned with a net-debt ratio target of about 13% even if Brent trades at $30 through the next year. It’s worth noting that Brent is already at $41 per barrel.
The discussion on fundamentals is also important as CVX stock has a forward dividend of $5.16. So with oil recovering and with the company prioritizing dividends, the stock is attractive for income investors. And in the long-term, I expect further growth in dividends as cash flows swell.
Looking as the assets, Chevron Corporation has 71bboe of upstream resources. That said, a strong financial position will allow the company to convert these resources into sustained cash flows in the coming years. Moreover, the Permian asset is expected to deliver more than $4 billion in annual free cash flows in the long-term. This is a good example of the cash flow potential from assets. And with assets in Gulf of Mexico, West Africa and Brazil, among others, the company has ample production upside visibility.
Collectively, CVX stock is worth holding in your core portfolio for the dividends and meaningful stock price upside in the coming years.
Occidental Petroleum (OXY)
Occidental Petroleum has been burdened by the acquisition of Anadarko Petroleum in FY2019. However, I believe that if the company can de-leverage in the coming quarters, there is ample scope for value creation.
From a de-leveraging perspective, the company has already paid $7 billion in debt with no maturities in the current year. And with the recent junk bond sale worth $3 billion, the company will refinancing debt maturities in the next year. Occidental Petroleum has also planned non-core asset sales to reduce debt.
In addition, the company has $5 billion in credit facility and $1 billion in cash. So from an asset perspective, the company is among the largest U.S. acreage holders. And as oil trends higher, there is ample scope for free cash flow generation with Occidental Petroleum having a deep drilling inventory.
Therefore, beyond the current headwinds, OXY stock is attractive — and I believe that the stock has bottomed out.
Among the big names, BP stock is also worth considering for the long-term. After an initial decline that was in line with the oil price meltdown, BP stock has been in a consolidation zone. So as oil gradually trends higher, I expect the stock to gain positive momentum after consolidation.
From a liquidity perspective, BP is well-positioned with a total liquidity buffer of $32 billion at the end of March 2020. And for the current year, the company expects organic capital spending of $12 billion. Therefore, given the liquidity, the company is fully financed for the next 12-24 months. In addition, BP also plans to deliver $15 billion in divestment by FY2021. In turn, this will help in de-leveraging.
The company’s upstream assets will continue to deliver strong cash flows in the long-term as EBITDA margin gradually expands. And besides oil trending higher, focus on reducing production cost per barrel will help in EBITDA margin expansion.
Overall, BP stock is attractive at current levels, and the company has quality assets to deliver sustainable cash flows. Moreover, the company is also attractive for income investors with dividend growth visibility beyond the current headwinds.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.