This is the time of year to look for big-ticket items on sale... for under the tree or for your portfolio! And with Brent Crude prices sliding below $60 a barrel for the first time all year, there are dozens of oil stocks trading at a discount to their summer highs.
We asked three Motley Fool contributors which oil stocks look like good buys right now, and they came back with Anadarko Petroleum (NYSE:APC), ExxonMobil (NYSE:XOM), and Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B). Here's why they think these stocks are great selections for the long term.
Well positioned for whatever happens with oil prices
Matt DiLallo (Anadarko Petroleum): After rising steadily for nearly two years and hitting a high of more than $70 a barrel in early October, crude prices have tumbled over the past month, crashing back toward $50. That wipeout highlights why investors should focus on owning oil stocks that can thrive in both good times and bad.
One oil stock built to weather the current market conditions is Anadarko Petroleum. That's evident in the company's recently released plans for 2019. The oil giant expects to invest $4.3 billion to $4.7 billion on expansion projects next year, which should grow its oil production 10% compared with 2018's average. More importantly, Anadarko Petroleum can finance that budget on the cash flows produced at $50 oil, which is below the current oil price. Meanwhile, the company noted that it would generate significant free cash flow if oil prices rise, with it able to produce $1.6 billion in free cash at $60 oil.
Anadarko plans to use that money, as well as the nearly $4 billion it has in the bank after selling its midstream assets, on three things. First, it added another $1 billion to its share repurchase program, bringing it up to $5 billion. The company has already spent $3.5 billion in the past year to retire 10% of its shares, leaving it with $1.5 billion remaining on that plan, which it expects to complete by the middle of 2020. The oil giant also plans to retire another $500 million in debt next year, bringing its repayment total to $2 billion. Finally, it boosted its dividend another 20% and has now increased its payout by a jaw-dropping 500% in the past year.
With shares of Anadarko's stock plunging more than 30% from its recent high, now is a great time to buy the oil giant, since it can thrive no matter what happens to oil prices in 2019.
The "big" in big oil
Travis Hoium (ExxonMobil): The oil market can be one of the most volatile commodity markets in the world, swinging wildly on oil prices and investment decisions companies large and small are making to adapt to the market. That puts a lot of stress on companies and investors alike. One company with a business diverse enough to adapt to any changes in the market is ExxonMobil, and that's why it's my favorite oil stock today. The energy giant does everything from drilling for oil to refining oil to putting it into people's vehicles.
What I want to focus on today is the cash that's generated by this oil business. You can see in the chart below that ExxonMobil generated $16.8 billion in free cash flow over the past year and $23.2 billion of net income. Both metrics can swing depending on where oil prices are at any given time, but long term this is billions of cash flow generated by the business.
Importantly, this cash flow funds the 4.2% dividend yield investors currently get from the stock. Long term I think we'll see cash flow growth as oil consumption increases globally and disruptive replacements take longer than expected to gain traction. ExxonMobil isn't investing in new technologies that may never pay dividends, it's all about oil, natural gas, and generating cash flow -- and for investors looking into the oil industry, that's a good position to be in.
Beyond the breakeven
John Bromels (Royal Dutch Shell): Let's start with the good news. Although slumping oil prices have shaved some money off of oil companies' stock prices, those share price declines have translated into higher dividend yields for oil companies. Best-in-class dividend payer Royal Dutch Shell is now sporting a 6.2% yield, higher than it's been all year! But that's not the only reason to invest in this big oil company.
One reason is that Shell embarked on a cost-cutting spree during the big global oil price slump of 2014-2017, and managed to push its average break-even price down below $50 a barrel. That means that even with today's lower oil prices, Shell will still be able to turn a profit. Better yet, many of Shell's assets have break-even prices of less than $40 a barrel. One recent Shell deepwater project began production in May with a break-even price of less than $30 a barrel.
But even if oil prices continue to drop, Shell has its bases covered. For one thing, as a Big Oil major, it derives a significant portion of its income from its refining and marketing operations, which aren't as tied to the price of oil as its production operations. Also, Shell has been aggressively buying back shares, and expects to repurchase $25 billion worth of its own stock by 2020, which will make existing shares more valuable. And if oil prices drop hard and never recover? The company is making substantial investments in the liquefied natural gas (LNG) sector, in which CEO Ben van Beurden projects demand outstripping supply in the early 2020s.
All told, if there's an oil company built to withstand a drop in the price of oil, it's gotta be Shell.
John Bromels has no position in any of the stocks mentioned. Matthew DiLallo has no position in any of the stocks mentioned. Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.