The past year has been a wild ride for oil prices and investors in oil stocks. Brent crude prices topped $85 a barrel in late 2018 before crashing to end the year at about $50. Then they rose again through May, to more than $70, before easing back down again. Currently, they're sitting below $60. Not great, but not terrible.
With all of this volatility, what's an oil investor to do? We approached three of our Motley Fool contributors to ask what oil stocks they think are good buys in the current environment. They came back with Casey's General Stores (NASDAQ:CASY), Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B), and Chevron (NYSE:CVX). Here's why they think these oil stocks are worth a look right now.
The rural gas station stop
Travis Hoium (Casey's General Stores): We know that electric vehicles are coming to the auto industry, but that hasn't stopped oil consumption from rising as bigger vehicles become more popular with consumers. One of the beneficiaries is Casey's General Stores, which operates primarily in small towns and rural communities.
Casey's has the advantage of rising oil consumption overall, but it won't be affected by an energy transition until long after many of its competitors are. More rural communities don't have the infrastructure for increased electric or hydrogen vehicles, and the high-performance trucks that are popular there are a long way from seeing internal combustion being replaced.
What isn't going to change is the strength of non-fuel in the convenience store side of the business. In fiscal 2020, management expects grocery and other merchandise same store sales to rise 2.5% to 4% while prepared food is expected to grow 3% to 6%. All that while gallons of fuel sold are expected to be flat.
Casey's stock is expensive today, trading at 30 times trailing earnings and paying just a 0.8% dividend yield, but it has relatively little competition and a lot of stability in the energy business. That's what I'm looking for from an oil stock today even if I have to pay up to get it.
After a rare miss
John Bromels (Royal Dutch Shell): The past year hasn't just been rough for oil prices; it's also been bad for the oil industry as a whole. As measured by the SPDR S&P Oil and Gas Exploration & Production ETF, the industry has lost nearly half its market value over the past year. However, oil major Royal Dutch Shell is bucking that trend, with its stock down only 14.4% in the same period.
Much of that drop came after Shell reported a rare disappointing quarter on Aug. 1. While operating cash flow was up 16% year over year, net income fell by a frightening 50%, to $3.0 billion. Shell blamed "lower realized oil, gas, and LNG prices" and "weaker realized chemicals and refining margins" for the hit. In past quarters, Shell seemed oddly immune to fluctuating energy prices, but the macro environment seems to have finally caught up with the company.
The good news for investors is that the stock's valuation seems to be at five-year lows. Shell's price-to-earnings ratio is now just 11.3, easily the lowest among the oil majors, while its dividend yield of 6.7% is the highest. And as long as the company can keep churning out cash, investors should have no qualms about the stability of that dividend.
Nobody knows where oil prices are headed, but in a volatile time for the industry, investing in stability may be the best strategy. That's why Royal Dutch Shell looks like a good choice for oil investors now.
Surprise! This oil giant is gushing cash
Rich Smith (Chevron): With the price of oil down 27% since October, you might expect that oil companies would be struggling to make a buck these days. In some cases, you'd be right. ExxonMobil, for example, is currently generating only about $0.64 for every $1 it claims to be "earning" as net income. But in other cases, you'd be wrong.
Chevron stock is one of the latter cases.
With total free cash flow of $18.5 billion generated over the past 12 months, Chevron is more profitable than meets the eye, churning out $1.25 in real cash profit for every $1 it reports as accounting profit on its income statement. Chevron's using that cash to pay a big dividend -- 4.1%, so about twice what the average S&P 500 stock pays -- and to buy back stock as well, totaling about $4 billion to $5 billion a year.
The result of this shareholder-friendly cash deployment is that earnings are compounding among a shrinking share count, growing faster than they would if the share count remained constant. Between the 4% divvy, 6% projected earnings growth, and buybacks boosting per-share profits by another 2% or so per year, Chevron stock is now on pace to generate 12% annual returns to its shareholders -- not bad at all for a stock trading for a mere 12 times free cash flow.