The oil price crash of 2014 made many investors realize that they were in the wrong oil stocks for their temperament. For some investors, volatility and the possibility that their investment could be cut in half, just isn't an option. It's why they'd be better off sticking with a best of breed oil stock and leaving the volatility to others. Here's a list of the best oil stocks the market has to offer.
Best of breed: Big oil
There are five supermajor oil companies in the world. The top two are ExxonMobil (XOM 0.23%) and Chevron (CVX 0.22%). The main reason Exxon and Chevron are on top is because both are built on a rock solid foundation thanks to their fortresslike balance sheets, which we can see on the slide below.
Source: ExxonMobil Corporation Investor Presentation
As that slide notes ExxonMobil has a Triple-A credit rating, which makes it one of the truly elite companies in the world. Meanwhile, Chevron isn't all that far behind with its Double-A credit rating. These ratings due to the very low leverage each carries, as leverage is less than 10% of their total capitalization. That's nearly half the leverage of Royal Dutch Shell (RDS.A) (RDS.B) and well below the leverage used by BP (BP 1.22%) and Total (TTE 0.30%).
In addition to their strong balance sheets, Chevron and Exxon are the best of breed when it comes to returns. As we see on the following chart they lead their peer group in returns on equity, capital, and assets.
CVX Return on Equity (TTM) data by YCharts
Clearly, investors looking for a big oil stock should look no further than ExxonMobil and Chevron.
Best of breed: Independent oil & gas
That being said, some investors want just a bit more growth than big oil can provide. For that, they can turn to one of the three best of breed independent oil and gas companies: ConocoPhillips (COP 0.42%), Devon Energy (DVN 1.04%), or EOG Resources (EOG 0.88%).
Like the big oil duo, what makes these three best of breed starts off with their balance sheets. All three have investment-grade credit ratings and fairly low leverage. This is vitally important as it will keep all three afloat during the current market turmoil. While other oil producers are worried about their balance sheets, these three can focus on driving strong returns.
Those returns are the other reason why these three are best of breed. As the slide below shows, EOG Resources and ConocoPhillips have continued to enjoy strong returns during the downturn.
EOG Return on Equity (TTM) data by YCharts
Both companies far outpaced the returns of other independents as the peer average for return on capital employed last year was 4.8%, while the peer average return on equity was 6.9%.
While Devon Energy's returns have fallen in 2015, that's largely due to a big write down it took in the first quarter. Operationally, the company is firing on all cylinders as it recently raised its 2015 oil production guidance 7.5% higher than its previous outlook despite the fact that it's reducing capex by 6% as its wells continue to get better and better.
Investor takeaway
While there are hundreds of oil stocks on the market, only five are truly best of breed. These include big oil behemoths Exxon and Chevron that combine balance sheet strength with the ability to drive meaningful returns. Likewise, independents ConocoPhillips, EOG Resources, and Devon Energy really rise to the top as all three have strong balance sheets and are returns driven organizations.
