In a classic case of "buy the rumor and sell the news," oil prices gave back some of their recent gains on Tuesday, falling about 2.4% after President Trump officially announced his decision to pull the U.S. out of the Iran nuclear agreement while imposing "powerful" sanctions on the country. However, crude prices had risen steadily in advance of that announcement, recently topping $70 a barrel in the U.S. under the assumption that Iranian oil exports will decline as a result of the president's actions. Because of that, they could resume that rally as more details emerge on the extent of the sanctions.
As things stand right now, analysts anticipate that at least some Iranian oil will come off the market as a result of the sanctions. That lost output would further tighten an oil market that suddenly has little margin for error thanks to red-hot demand and tame supply growth. That's the recipe for higher oil prices and could make top-tier U.S. oil stocks Anadarko Petroleum (APC), Devon Energy (DVN -1.39%), and ConocoPhillips (COP -0.72%) big winners in the coming years.
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Getting ready for the gusher
On one hand, Anadarko, Devon Energy, and ConocoPhillips don't need higher oil prices to thrive. In fact, all three spent the past few years repositioning their businesses so they can prosper at $50 a barrel. At that price point, each one can generate the cash they need to grow oil production and cash flow at a more than double-digit compound annual rate over the next three years.
However, the upside of their ability to thrive at $50 oil is that they stand to reap a windfall with crude in the $70s. In Anadarko Petroleum's case, it's on pace to produce $3 billion to $4 billion in excess cash over the next three years, and that's assuming $60 oil. Devon Energy, meanwhile, could generate more than $2.5 billion in free cash over that same time frame, again at just $60 oil. ConocoPhillips, likewise, will cash in above $50 a barrel.
Sending back the bounty
Because of that, these oil companies are already making plans to send a large portion of this money back to shareholders. All three increased their dividends this year -- including a stunning 400% increase from Anadarko -- as well as plans to repurchase shares. Anadarko and ConocoPhillips started buying back stock last year after selling assets. However, both recently boosted their buyback plans by $500 million for 2018 because oil prices are above their $50 baseline level. Devon Energy, meanwhile, recently authorized a $1 billion buyback. All three will likely buy back even more shares if oil remains above $50 a barrel.
These increasing cash returns have already started paying dividends for investors as shares of both ConocoPhillips and Anadarko are up 20% since the start of the year. However, even with those big gains, these oil stocks remain undervalued given the cash their businesses can generate in the coming years at current oil prices, suggesting much more upside from here.
A powerful combination
Because Anadarko, ConocoPhillips, and Devon reset their businesses to run on $50 oil, they'll produce a gusher of excess cash at current prices and even more if Trump's sanctions cause crude to continue rising. With all three planning to return the bulk of that windfall to investors, they could be among the biggest winners from Trump's decision to pull out of the Iran deal, making them ideal oil stocks to consider buying now.
