Oil prices haven't bounced back as expected this year, which has weighed on oil stocks, including big oil companies ExxonMobil (XOM 0.39%), ConocoPhillips (COP 0.39%), and Occidental Petroleum (OXY 0.58%). That trio has been particularly walloped this year, falling more than 10% apiece even though crude is only down 5%. That underperformance is coming despite the fact that these oil giants have improved their ability to thrive at lower prices, which is why investors with a long-term mindset should consider scooping up shares.
Getting closer to the pivot point
Occidental Petroleum has endured the steepest decline of this group, falling more than 16% this year. That slump comes despite recently reporting solid second-quarter results, where it delivered 7% higher production from its Permian Basin resources, recorded its 15th consecutive annual dividend increase, and bolstered its cash position to $2.2 billion. In addition to its solid financial and operational performance, the company also started up a new chemical plant in Texas and sold some non-core acreage in the Permian, reinvesting the proceeds to acquire additional working interests in several enhanced oil recovery assets in the region.
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These strategic moves are worth noting because they keep the company on a pathway to get its break-even level down to $50 a barrel, which would enable the company to pay its current dividend and finance the capital needed to fuel 5% to 8% annual production growth within cash flow. While the company still needs to hit a few more milestones to achieve all those goals at the price point, it's getting closer by the day. Once it reaches that level, Occidental Petroleum has the potential to deliver low double-digit total returns to investors on an annual basis even if oil stays in the $50s for the long-term.
Lots of low-cost oil with more on the way
ExxonMobil's stock is down a surprising 15% this year even though it is one of the strongest operators in the industry. In fact, the company's underlying operations already generate more than enough cash flow to support its current dividend as well as the capital needed to maintain and grow its production. Last quarter, for example, Exxon produced more than $7.1 billion in cash, which covered the company's $3.9 billion in capital outlays and its $3.3 billion in dividends.
Because of its strong financial position, ExxonMobil has been able to move forward with low-cost oil projects that should bolster cash flow in future years. One of the most compelling is its Liza project offshore Guyana, which is a world-class field that should start producing by 2020. The project has a development cost of less than $10 per barrel of oil equivalent and should deliver a discounted cash flow return of more than 10% at $40 oil. Add to that its high-return position in the Permian and a host of other return-focused projects around the world, and ExxonMobil can deliver steady growth and a compelling dividend in the current low-price environment, making it a top oil stock to hold for the long-term.
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Overdelivered and ahead of schedule
ConocoPhillips' stock has fallen nearly 12% this year despite the fact that it not only outperformed its objectives to reposition its portfolio but did so three years ahead of schedule. Initially, the company planned to sell $5 billion to $8 billion of primarily natural gas assets in North America by 2019, which would give it the cash to pay down debt and repurchase stock. However, the company has already announced $16 billion of asset sales this year, highlighted by the sale of a significant portion of its Canadian assets to Cenovus Energy (CVE 0.81%) in a $13.3 billion deal. These transactions provided it with the cash needed to meet its debt reduction and buyback targets three years early, which allowed it to set new goals for 2019.
The share repurchases are worth pointing out because they have the potential to deliver a meaningful impact for investors. For example, while the company expects to generate asset sale adjusted production growth of 3% this year on an absolute basis, output has the potential to increase by 8% on a per share basis if it completes its planned repurchases at around the current stock price. Meanwhile, ConocoPhillips can achieve that compelling growth rate and fund a growing dividend, all while living within cash flow at $50 oil, putting it on par with Exxon and Occidental.
Low-cost oil stocks for a lower price
All three of these big oil stocks can thrive at current oil prices since each can generate enough cash from operations to finance their dividend and some growth-focused spending. That alone makes them excellent long-term buys. However, what makes them even better opportunities right now is the fact that their stock prices have fallen double digits this year despite the progress they've made on their strategies to thrive at lower oil prices. Because of that, investors can buy these excellent companies for a compelling price, which should enable them to earn solid returns over the long-term even if oil never recovers any further.
