A recent report in the Wall Street Journal explained the opportunity in oil stocks succinctly. It begins by noting that Big Oil is generating massive cash flows on high oil prices. Those massive cash flows are leading to record revenues.
That news in and of itself bodes well for oil stocks. Record revenues should push stock prices higher.
Meanwhile, investors are calling for oil companies to return the windfall to shareholders. The companies are listening and directing that cash to investors in the form of dividends and share buybacks. That, too, is a good sign for oil stocks.
Of course, all of this positive news has been precipitated by oil prices that are higher than they’ve been in a long time. Crude oil prices eclipsed $80 in the first two weeks of October. That was a first since 2014. Early in November, that price sits around $85 per barrel.
Differences in strategy continue to exist between European oil stocks and those based in the United States. European producers continue to direct more attention — and cash — to renewable projects. But oil companies on both sides of the pond are rewarding investors who’ve suffered for multiple quarters due to the pandemic and multiple years as oil fundamentally shifts.
Let’s take a closer look at seven of these oil stocks that can deliver extraordinary profits to investors:
- Exxon Mobil (NYSE:XOM)
- Chevron (NYSE:CVX)
- Hess (NYSE:HES)
- Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B)
- Valero (NYSE:VLO)
- National Fuel Gas (NYSE:NFG)
- Devon Energy (NYSE:DVN)
Oil Stocks: Exxon Mobil (XOM)
Exxon Mobil is in a position of strength, and that bodes very well for its investors. The company just reported quarterly earnings of $6.8 billion. Those earnings, the firm’s best quarterly results since 2017, came on the back of $73.79 billion in revenues for the quarter.
Through the first nine months of the year, those figures contrast starkly with those from 2020. This year, Exxon Mobil has topped $200 billion in revenue. Last year, that figure was a much lower $134.96 billion.
Through the first three quarters of 2020, Exxon Mobil suffered a loss of $2.37 billion. Through the same period in 2021, the firm has recorded $14.17 billion in net income. It’s fair to say the company is back, and its stock is more appealing than it’s been in a long time.
On the results, CEO Darren Woods noted:
“Free cash flow more than covered the dividend and $4 billion of additional debt reduction. With the progress made in restoring the strength of our balance sheet, this week we announced a dividend increase maintaining 39 consecutive years of annual dividend growth.”
Exxon Mobil also announced a $10 billion share buyback program to begin next year. On top of that, the company will outline a strategic list of financially accretive lower-carbon opportunities as it balances current opportunities and future direction.
Chevron, like Exxon Mobil, also had a record quarter. The company reported $6 billion in earnings, making Q3 2021 its best quarter since 2013. The $6.7 billion of cash flow Chevron generated was its best-ever.
The company released earnings results on Oct. 29, which were stellar. But even two days prior to that, positive news was already beginning to trickle out of the firm. Chevron announced its third straight $1.34 dividend.
That was certainly not surprising, as the company hasn’t reduced its dividend since 1984. But at 5 cents higher than its dividend a year prior, the news is clearly positive.
The truly big news, though, was Chevron’s impressive quarterly results. In addition to those previously mentioned earnings and cash flow figures, there was also dividend news. The company repurchased $625 million worth of shares during the quarter. That figure was at the high end of its guidance.
The strong quarter marks a longer turnaround from the depths of the pandemic. Through the first nine months of 2020, Chevron reported a loss of $4.9 billion.
But due to the combined effects of businesses reopening and high per-barrel prices, this year has been much improved. That $4.9 billion loss through Q3 last year has become a $10.61 billion net gain in 2021.
Oil Stocks: Hess (HES)
One of the better reasons to invest in Hess is that it strikes a balance between the Environmental, Social and Governance (ESG) concerns of the future and the need to make money today.
Let’s start with the latter first. On Oct. 27, the company reported earnings for the third quarter. The firm saw net income of $115 million in Q3. Like pretty much all oil firms, this is in stark contrast to last year’s results. Indeed, Hess reported a $243 million loss in Q3 2020.
On top of the turnaround in income, investors have other reasons to be interested in Hess. The company announced positive news on the exploration and production front as well: It saw an increase to the gross discoverable resource estimate on its Guyana asset, Stabroek Block. The previous 9 billion barrels of oil estimated to be recoverable has been upgraded to 10 billion barrels.
That clearly bodes well for the firm, as it relates to the business of recovering and marketing oil. But oil firms must balance that against a changing energy landscape as well.
This generally equates to ESG strategy. There, too, Hess is a sensible investment. It has long been a leader in that regard, and has received a AA rating from the MSCI ESG for the past 10 years. That rating was recently bumped to AAA, the highest possible level.
Royal Dutch Shell (RDS.A, RDS.B)
Royal Dutch Shell is a Netherlands-based firm. In the context of this article, that’s what makes it worthy of consideration as an investment.
What I’m getting at is that Shell is taking a fundamentally different tack than its U.S. counterparts. Therefore, it can act as a sort of diversified oil play with its greater ESG commitment.
That said, the latest news on the company was summarized succinctly by Shell CEO Ben van Beurden in the latest earnings report:
“This quarter we’ve generated record cash flow, maintained capital discipline and announced our intention to distribute $7 billion to our shareholders from the sale of our Permian assets. Today, we also set a new 2030 target to halve the absolute emissions from our operations, compared to 2016 levels on a net basis. Altogether, this is clear evidence of how we are accelerating our Powering Progress strategy, purposefully and profitably.”
Operationally, Shell is doing well. The firm is also taking big strides to achieve its ESG goals. For example, in September, Shell sold its assets in the Permian basin to ConocoPhillips (NYSE:COP) for $9.5 billion.
Shell will fund $1 billion of share buybacks in Q3, and plans to spend another $1 billion in Q4. It also announced $7 billion of additional shareholder distributions related to the Permian basin deal, which will begin in 2022. Those will begin after the ConocoPhillips deal closes in Q4.
Oil Stocks: Valero (VLO)
Valero reported earnings on Oct. 21. Both on a quarterly and year-to-date basis, Valero looks attractive.
Year-over-year, Valero’s Q3 revenues increased 86.73%, hitting $29.52 billion. Stockholders saw a loss of $464 million a year earlier, but that flipped and reached a positive $463 million in Q3 this year.
That is good news, of course, but it’s not wholly unexpected given the strong tailwinds across the sector.
A large portion of that $463 million of stockholder gains in Q3 found its way back into the pockets of shareholders. In fact, Valero returned $400 million to shareholders in the form of dividends.
That dividend strategy is a great part of the narrative for investing in VLO stock. Valero yields 5.07%. That is relatively high, especially in the context of oil stocks. It equates to a payment of 98 cents for each share of VLO owned. That means shareholders can expect roughly $4 of returns from Valero on an annual basis.
That provides a nice cushion against any share price decreases. Yet, that isn’t what Wall Street anticipates. In fact, based on average target prices of more than $90, VLO stock has a lot of upside at its current level around $77.
National Fuel Gas (NFG)
National Fuel Gas is smaller than the household names preceding it on this list. Additionally, the firm relies on natural gas as well as oil to buoy its business. So, it may not find itself on similar “oil” stock lists and articles. Nevertheless, it has certain appeal that makes it noteworthy.
Like Valero, NFG stock carries a relatively high dividend. It yields a more modest 3.17% — less than VLO, but higher than many oil stocks.
Again, that dividend provides cushion in the worst of times. However, like Valero, Wall Street is also strong on National Fuel Gas. Average target prices sit at $61.50. Thus, there is reasonable upside from its current price around $57.
That makes NFG stock a somewhat differentiated oil trade. It won’t exhibit as much volatility on oil prices as others on this list will. But its greater appeal is as an income stock with roots in utilities as well.
Oil Stocks: Devon Energy (DVN)
Devon Energy is an easy pick to make. It has plenty of upside at current levels, making it a Wall Street darling.
That’s why it makes sense to consider a purchase even as oil prices hit a 7-year high. One of the primary reasons is that Devon Energy pays a unique type of dividend called a fixed-plus-variable dividend.
The company explained is dividend in an announcement dated Aug. 3:
“The company’s fixed-plus-variable dividend framework is designed to pay a sustainable fixed dividend through the cycle and evaluate a variable dividend on a quarterly basis. After the fixed dividend is funded, up to 50 percent of the remaining excess free cash flow in each quarter may be distributed to shareholders through a variable dividend.”
That should be very interesting as earnings are reported. The unique structure implies shareholders may benefit significantly, with cash flows likely to be strong for some time to come.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.