It's almost hard to believe, but America's total oil production is only 300,000 barrels per day short of the peak we saw back in 2014. What's even more incredible about that statistic is that this rebound occurred while oil prices were half of what they were when oil production last peaked. This feat has investors flocking back into energy stocks again.
As with any other cyclical industry, blindly buying energy stocks on the premise that the market will rebound isn't the best way to invest. Instead, you need to look for top-shelf stocks that are going to generate returns over time. So, we asked three of our energy contributors to each highlight a stock they see as an oil stock to buy now. Here's why they picked Devon Energy (NYSE:DVN), National Oilwell Varco (NYSE:NOV), and ONEOK (NYSE:OKE).
The market is completely missing this transformation
Matt DiLallo (Devon Energy): Shale driller Devon Energy's stock has been selling off all year and is down 17% year to date. That's despite clear evidence that the company's operations are turning a corner. The most recent confirmation came in its first-quarter report, where Devon's production blew past its guidance, enabling the company to beat analysts' expectations.
However, it wasn't just that Devon announced impressive numbers, it was how it got there that stood out. The company noted that several recent innovations to its drilling process helped it significantly improve well productivity compared to prior results. For example, in the Eagle Ford, the company's latest well completion design, which uses up to 15 million pounds of proppant, is helping the company deliver industry-leading well productivity that's 50% higher than the peer average. Further, new spacing tests in the Eagle Ford have enabled the company to drill and complete wells in several stacked formations at a brisk pace, which is boosting drilling returns. Meanwhile, the company reported that four recently completed wells in the Rockies delivered initial production rates 80% above forecast.
Because of these needle-moving innovations, Devon can produce more oil for less money, which is the key to thriving in the current oil environment. At some point, the market will realize that Devon has turned the corner and positioned itself to deliver robust, returns-driven growth. In the meantime, investors buying in May can pick up this top-tier oil stock for a much lower price than earlier in the year.
The buying window is still open
Tyler Crowe (National Oilwell Varco): Investors' attention seems to be focused almost exclusively on what's happening in America's shale patches these days. Who can blame them since shale drilling is where all of the action is today. Producers have found ways to coax oil and gas out of shale wells and generate a decent return at $50 a barrel. So far, that has offset production declines from the rest of the world and kept money from flowing into other developments, such as offshore.
These market conditions make National Oilwell Varco such an attractive stock to buy today. Even though revenue is evenly split between onshore and offshore equipment today, NOV is an offshore equipment manufacturer at its core. More than 80% of all drilling-related equipment on an offshore rig is National Oilwell Varco branded equipment, and the company has made sizable investments in floating production, storage, and offloading (FPSO) equipment.
Eventually, shale growth will not be able to meet global demand growth and production declines, which means offshore drilling will be back again. We're already starting to see evidence of this as some integrated oil and gas companies have started to increase spending levels, and rig owners are fielding calls from customers. As all of those idle rigs head back out to work, they'll need equipment that will likely come from National Oilwell Varco. After that, we can probably expect demand for new FPSO builds to increase as producers develop offshore fields.
This means National Oilwell Varco will see multiple waves of recovery over the next several years. That first wave is here, with onshore equipment sales increasing, but there are several more to come. For investors who are willing to wait a few years for a payoff, then buying shares of National Oilwell Varco now in anticipation of these next few waves of demand growth should pay off.
A great dividend stock that's about to get even better
Jason Hall (ONEOK Inc): A little more than a year ago, the oil and gas industry was in a shambles. Crude prices were at their lowest levels in almost a decade, and a glut of global supply was driving fears that it could get even worse. Things had gotten so bad that even midstream companies -- which generally have very stable revenues and cash flows -- were finding themselves in tough financial straits, leading many to slash their dividends to preserve cash flows.
ONEOK was one of the few to come through this period unscathed, and patient investors have done very well. Since bottoming out in February 2016, ONEOK's stock price is up more than 150%, and its dividend is more secure than ever. As a matter of fact, it's actually set to go up even more in the near future.
This is because ONEOK is buying out ONEOK Partners LP (NYSE:OKS), its master limited partnership that ONEOK controls as general partner and also owns a major equity stake in, and consolidating all of its operations into ONEOK. Management says this will not only simplify operations, cash flows, and capital spending, but it will also allow the consolidated business to increase the dividend by as much as 20% soon after the merger is completed.
At recent prices, ONEOK shares already yield 4.7%, a tidy sum on its own. For investors looking for a above-average yield, and a good shot at dividend growth. ONEOK is a stock worth buying now.
Jason Hall owns shares of National Oilwell Varco and ONEOK. Matt DiLallo owns shares of National Oilwell Varco. Tyler Crowe owns shares of National Oilwell Varco. The Motley Fool owns shares of and recommends National Oilwell Varco and ONEOK. The Motley Fool owns shares of Devon Energy. The Motley Fool recommends ONEOK Partners. The Motley Fool has a disclosure policy.