If you are looking for oil stocks to buy right now, then you need to do a deep dive into Devon Energy Corporation (DVN -0.46%), ExxonMobil Corporation (XOM -0.09%), and Royal Dutch Shell PLC (RDS.B). Exxon and Shell have been treading water all year, despite improving underlying conditions both in the oil market and within their respective businesses. A recent sell-off has made both worth a second look today. Devon's stock, meanwhile, has been crushed this year, down nearly 20% -- a drop that doesn't look justified when you dig into the business.
Here's the lowdown on this trio of oil stocks chosen by these Motley Fool contributors.
Back on sale
Matt DiLallo (Devon Energy Corporation): The price of a barrel of oil has rocketed 40% in the past year, taking most oil stocks up with it. One notable laggard has been Devon Energy, which somehow managed to lose 1% of its value in the past year. That underperformance makes no sense considering that Devon's profitability has risen sharply, as have its growth prospects.
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Devon Energy's poorly performing stock forced its management to take action. One of those moves was the initiation of a share buyback program earlier in the year. The company initially authorized a $1 billion plan that at the time was enough to retire 6% of its outstanding stock. But after selling its midstream business, the company boosted that program up to $4 billion. That's enough to retire 20% of its outstanding stock, which is an industry-leading level given the one-year time frame in which the company expects to complete its plan.
Meanwhile, with Devon on pace to produce more than $2 billion in free cash flow in the coming years (and that's assuming oil prices slip to the $60-a-barrel range), it should have even more dry powder to continue buying back stock.
While the buyback initially boosted shares, they've come back down in recent weeks, slumping nearly 25% off their high due to October's market swoon. Because of that, investors have another shot at snagging this oil stock at what appears to be a bargain basement price, which is what makes it so compelling these days.
Playing the long game
John Bromels (Royal Dutch Shell PLC): When you think of a stock to buy "right now," you're probably hoping to get a recommendation that will bring some quick cash to your portfolio in the short term. While I think that oil major Royal Dutch Shell is likely to fulfill that desire (and how!), it's also a stock to buy right now while you wait for its long-term investments to pay off.
In the near term, Shell is benefiting from high oil prices. Brent crude and West Texas Intermediate crude prices are up materially from the below-$50 range they were trading at just a few years ago. And Shell has been driving down its operating costs in the interim, resulting in massive increases in net income and cash flow. It's using that cash to pay a dividend currently yielding 6%, and to buy back $25 billion in stock between now and 2020.
While all that is great news for investors, and a great reason to buy into the stock, Shell's long-term thesis is possibly even more compelling. The company has made big bets on energy projects besides oil. These include its major purchase of British gas giant BG Group during the oil price slump, which gave it exposure to the fast-growing liquefied natural gas market; a 44% stake in solar developer Silicon Ranch; the purchase of electric-vehicle charging station provider NewMotion; and numerous wind farms.
Of course, oil is still going to be Shell's primary product for years to come. But for investors looking for an oil stock that's planning for a renewable future, Shell is an excellent company to buy now.
The yield is 4% again
Reuben Gregg Brewer (ExxonMobil Corporation): Exxon was in rally mode between mid-August and mid-October. But it has cooled off again lately, recently falling nearly 8% in just two weeks, pushing the yield back into the 4% range. For conservative investors, it was a good buy at a 3.8% yield -- so it's an even better buy at 4%. Note that the yield is near its highest levels since the mid-1990s.
Exxon is one of the most conservative oil majors. For example, debt stands at just 10% or so of the capital structure, and the dividend has been increased for 36 years (a feat unmatched by its integrated oil major peers). And with the company's sizable upstream and downstream businesses, the impact of often-volatile oil prices is at least somewhat muted.
XOM Return on Capital Employed (TTM) data by YCharts.
The headline problems today are worries about Exxon's oil production, which has been weak, and execution, where return on capital employed has faltered. These are valid concerns, but Exxon is working to fix both, with a focus on profitable investment over quick fixes.
The goal is to double earnings (assuming oil in the $60 range) by 2025. That's a long-term focus that's basically par for the course at this industry giant, and it shows that righting the ship will take some time. But it's the right move for Exxon, considering that the company's financial strength gives it the wherewithal to continue with its plan even if oil prices hit a prolonged soft patch.
Meanwhile, if you like boring and conservative (and notable dividend yields), then buying Exxon could be the right move for you, even if the turnaround effort might be slow and trying at times. The recent pullback just makes the stock that much more attractive right now.
