After an extended bearish spell, there are now many reasons for investors to get excited about shares of oil producers. If you're an oil bull, this is the right time to accumulate energy shares of companies that are well positioned to benefit from strong crude oil demand while supplies could be shrinking as US sanctions against Iran knock out Iranian oil from the market beginning in early November.
Brent crude, the global benchmark for oil prices, is trading near the highest level in nearly four years. Some investors are speculating that oil’s next move is towards $100 a barrel. As well, the recent OPEC / NOPEC decision to leave production steady is another bullish signal for oil. That move, combined with looming sanctions and supply disruptions in places like Venezuela point to higher oil ahead.
It's hard to predict how and whether all this will play out, but if you're ready to bet on oil, two beneficiaries would be ConocoPhillips (NYSE:COP) and Exxon Mobil Corp (NYSE:XOM), our favorite picks for both momentum and long-term investors:
1. ConocoPhillips – More Cash for Shareholders
If you believe that strength in oil prices is here to stay, even for the short-run, ConocoPhillips is one of the best oil giants to own. After announcing a humiliating dividend cut in early 2016, the company has embarked on a turnaround strategy that has positioned it to benefit from surging oil prices better than many oil giants.
The main thrust of that revamp was to play defense, return cash to investors, and keep costs low. After re-balancing its portfolio—which focused on shedding high-cost assets—Conoco has been able to achieve a break-even at a much lower level, around $35 a barrel.
Investors liked this approach and turned bullish on the stock as oil prices began to surge early this year. Since then, COP shares have diverged from its largest peers and never looked back. ConocoPhillips stock has been by far the best-performing major US oil stock in the past one year, gaining about 60% during that period against the meager returns offered by super-majors, such as ExxonMobil and Chevron (NYSE:CVX).
The improvement in the company’s cost structure, combined with higher oil prices, are helping the Houston-based producer to return more cash to its investors. In 2018, the company has raised its dividend payout twice, while boosting its share buyback plan by $1 billion.
Conoco is currently trading at $72.28. Its cash from operations in the second quarter was $3.34 billion, almost double the level of a year ago. Free cash flow of $1.34 billion was four times the dividend obligation. It beat earnings and cash-flow forecasts and also exceeded expectations on production and raised guidance for the year.
2. ExxonMobil – Super Big for Long-Term Bulls
If you're focused on short-term gains, ExxonMobil, the world's largest publicly traded oil producer, isn’t for you. The reason: the company is taking a very different approach to create value for its shareholders.
Rather than fueling its share price by refraining from major spending and putting more cash into investors pockets via share buybacks, Exxon is initiating one of the biggest expansions in its corporate history.
The company plans to spend $200-billion over the next seven years on low-cost mega-projects that will help maintain the company's dominance in oil and natural gas markets for decades. If all this materializes, and the price of oil remains around $60 a barrel, Exxon’s management expects the company will be able to double earnings by 2025.
In the short-term, however, this impressive long-term growth plan has been a major drag on the company’s shares. This year, its shares have risen just 5% to a current price of $86.13 and it’s unlikely that they will catch up soon with other producers, such as ConocoPhillips.
That said, it’s a good time to own Exxon shares if your objective is to earn steady dividend income. The stock currently yields around 4%, one of the best yields since the mid-1990s, compared to ConocoPhillips’ 1.56%. Exxon has increased its dividend payout every year for the past 36 years.
Bottom Line
Both Conoco and Exxon stocks are great picks if you plan to have some exposure to energy markets.
Exxon has a diversified portfolio of assets that provide a superior hedge against the swings in oil prices, while ConocoPhillips has momentum that shows no sign of peaking as long as oil prices remain elevated. In our view, a strategy in which investors equally divide their investments between these two solid names is a good idea.