It’s been a hell of a year for oil stocks.
Oil started the year at around $65 a barrel for Brent Crud,e and was moving lower in January and February when the novel coronavirus pandemic sent markets spiralling downward. At the same time, a price war erupted between Saudi Arabia and Russia — which, combined, led to a complete crash in oil prices. And as the smoke cleared, oil prices turned negative for the first time ever.
However, prices have since recovered, and Brent Crude is now trading at just under $46 per barrel. That said, prices are forecast to rise to $50 a barrel during the remainder of this year — and could reach $60 per barrel in 2021. Still, though, the roller coaster ride has seriously damaged many of the world’s top oil companies and depressed their share prices.
Therefore, in this article, we look at four oil stocks that investors should consider buying if demand returns to its pre-pandemic levels. These are oil companies that are among the best positioned to withstand the current turmoil and emerge safely on the other side of the economic storm. They are:
So, let’s dive in!
Oil Stocks to Buy: Chevron (CVX)
Chevron stands out among oil producers for a number of reasons. Among them, the company has maintained its dividend yield of about 6.1%, while other oil companies have abandoned their dividend altogether. Also, Chevron bought Noble Energy — another oil producer — for $5 billion in an all-stock deal this past July despite the global pandemic.
However, Chevron faced a difficult second quarter. With adjusted loss of $3 billion, it was forced to write down 100% of its $2.6 billion stake in its Venezuela business. In turn, the low price of crude oil resulted in another $1.8 billion in charges. Also during the first quarter, Chevron announced that it was cutting capital expenditures to $14 billion and lowering operating expenses by another $1 billion to manage the global economic downturn and market turmoil.
Additionally, Chevron has among the best balance sheets of the major oil companies. Its credit ratings of AA/Aa2 have been reaffirmed by S&P Global and Moody’s, which should allow it to access low cost debt as it navigates the current uncertainty. Also, the company’s “net debt ratio” of 14% is lower than most of its peers, and could be raised to 25% without causing too many issues.
Overall, Chevron seems to have the resources, flexibility and approach needed to get through this awful year and be in a decent position when better market conditions prevail. That said, CVX stock currently looks like a buying opportunity at just over $83 per share — down 31% year-to-date.
Exxon Mobil (XOM)
Despite the chaos in oil markets this year, Exxon Mobil retains a sturdy balance sheet. Exxon provides a dividend yield of 8.7%, which is among the best in the industry. They also declared a cash dividend of 87 cents for the third quarter of this year, the same amount as the dividend in the second quarter of 2020.
Moreover, the company reported second-quarter revenues of $32.6 billion. This is even as its production level declined by 10%. Exxon, which retains its crown as the largest U.S. oil company, also slashed $10 billion from its planned capital expenditures. And on that note, Chief Executive Officer Darren Woods said in a statement that it plans to “meet or exceed” its cost-reduction targets for 2020.
Also working in its favor is the fact that ExxonMobil can profitably pump oil from some of its fields around the world at current prices. Specifically, the company’s offshore Guyana field should be able to turn a profit at $40 per barrel of Brent Crude. And, the company plans to raise production in the Permian Basin to the point that it achieves 10% returns at $35 per barrel. This ability to execute low-cost production should help Exxon stay profitable even while oil prices remain low.
Overall, at just about $40 per share, XOM stock is trading 43% lower than where it was at the start of 2020. That said, investors seeking dividend income should grab shares before the stock price rises.
Oil Stocks to Buy: ConocoPhillips (COP)
ConocoPhillips stands out as one of the largest oil exploration and production companies in the world. In fact, the company has operations in more than a dozen countries. It also produces oil using a variety of sources and methods, including horizontal drilling and hydraulic fracturing of shale in the U.S. Additionally, ConocoPhillips runs lucrative oil sands mines in Canada, and deep water drilling in the Gulf of Mexico, as well as other conventional oil productions around the globe.
That said, this diversified portfolio means ConocoPhillips operates very low supply costs, with a significant portion of its oil reserves held at less than $40 a barrel. This means that the company can produce a substantial amount of cash flow even with low oil prices. Additionally, investors should also like the fact that ConocoPhillips balance sheet is intact. The company retains one of the highest credit ratings in the industry, supported by a large pile of cash that is close to $10 billion.
Collectively, all of this makes ConocoPhillips one of the best-positioned oil companies to weather the current volatility. And with its stock price down 43% since January to $37.30 a share, COP stock should appeal to bargain hunters and investors with long time horizons.
Kinder Morgan (KMI)
Kinder Morgan operates North America’s biggest natural gas pipeline network, and it’s a leader in transporting refined petroleum products and storing oil. Plus, the company is a leader in the transportation of carbon dioxide and uses CO2 to produce oil by injecting it into ageing oil fields to coax more crude oil out of the ground. However, the company has minimal direct exposure to oil prices because it generates most of its income from fee-based contracts. Those contracts support more than 90% of the company’s annual earnings.
Also, while about 10% of Kinder Morgan’s cash flow has some exposure to commodity prices, the company secures hedging contracts to lock in pricing on about half of those earnings. These features mean that Kinder Morgan’s earnings have been somewhat immune to the market volatility of recent months. Lastly, Kinder Morgan has a strong balance sheet that gives it the financial flexibility to continue making strategic investments, as well as return cash to shareholders through buybacks and dividend payments.
Believe it or not, Kinder Morgan increased its dividend this year while many of its competitors were cancelling theirs. And, overall KMI stock is the cheapest of the oil stocks on this list at just over $14 a share, down 34% year-to-date.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joel has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.