5 Best Petroleum Stocks to Buy

Image source: Getty Images. 

While most investors do not use the word petroleum all that often, it is basically a broad term for the oil sector. However, the word itself is simply the combination of the Latin words for rock (petra) and oil (oleum) and refers to companies that extract oil from rocks. As such, that literal definition is a perfect descriptor of the shale industry in the U.S. because producers have had to work tirelessly to figure out the best ways to extract oil from tight rock formations. Therefore, the best petroleum stocks are those that do an exceptional job extracting crude from shale. With that being the case, these five oil companies clearly stand above the rest: 

Source: Company investor presentations. 

Drilling down into the petroleum leaders

As the largest oil producer and acreage holder, EOG Resources (EOG 0.59%) is the undisputed king of the Eagle Ford. That said, it is not just the top producer because of its sheer size, but it delivers twice the initial production (IP) rates on new wells versus its peer group thanks to its ability to coax more oil out of tight rocks. Because of that ability, the company estimates that it could eventually pull 3.2 billion barrels of oil equivalent (BOE) out of the Eagle Ford. When adding in its other petroleum-rich plays, EOG Resources estimates that it can extract about 7 billion BOE, which provides it with decades of growth potential.

While EOG Resources is the best at getting the most petroleum out over a 30-day period, Devon Energy (DVN -0.89%) has the best IP rate over 90 days because of its ability to deliver higher sustained production rates. This is due to the company's leading position in the STACK play of Oklahoma. That reservoir has several important geologic properties -- thickness, permeability, porosity, and pressure -- which result in higher IP rates and bigger EURs of oil. On top of that, the company has strong positions in nearly all of the other top-tier shale plays, which positions it for robust growth in the years ahead. http://s2.q4cdn.com/462548525/files/doc_presentations/2016/062916-DVN-Presentation_JPM-Conf.pdf

Continental Resources (CLR) might be the leading acreage holder in the Bakken shale, but its focus is on the STACK and SCOOP plays right now. Because of their unique properties, Continental extracts more oil and gas per well than in the Bakken, which enables it to earn stronger drilling returns in the current environment. For example, at $50 oil Continental Resources expects to capture a 90% rate of return in the STACK compared to 45% in Bakken position. That said, with nearly 2 million net acres split between those two plays, the oil company has tremendous growth potential as it reaccelerates the development of these vast resources once oil prices improve.

Speaking of enormous resources, Pioneer Natural Resources (PXD 0.10%) believes that the Spraberry/Wolfcamp formations in Texas' Permian Basin hold upwards of 75 billion BOE of recoverable resources. By its estimation, it is the second biggest oil field in the world. Pioneer wants to make sure it extracts as much of that petroleum as possible, which is why it continues to test new well designs to improve productivity. The results of those tests continue to impress, with Pioneer's last 22 wells delivering a 25% improvement in production versus expectations.

Leading independent E&P ConocoPhillips (COP -0.43%) isn't a pure play on shale like the others on the list. However, it has done a much better job than most oil giants at getting shale drilling costs down. Further, the company is testing technology and efficiency improvements to drive better well performance. These tweaks, when applied to its extensive shale position in an improving oil market, have the potential to unlock a boatload of oil in the years to come.

Investor takeaway

The best petroleum stocks have two things in common:

• They possess prime acreage positions in the top shale plays.
• They are masters at figuring out the best ways to get more oil out of these tight rocks.

By having this combination, these companies can extract more oil and at a lower cost than their rivals. This not only pays off while prices are low, but could lead to enormous gains when oil prices rebound.