The third quarter of 2019 took energy stocks on a roller coaster ride they wish they could forget. The quarter began with crude oil around $59 a barrel before peaking at more than $62 on Sept. 16, only to fall to just over $54 a barrel by quarter's end. September ended near the quarterly low of $52.10 a barrel. October hasn't been much better. Crude has already tested its low of just above $52 a barrel in the first few days of trading.

Thankfully, investors can use this volatility to their advantage. ConocoPhillips (NYSE:COP), Chevron (NYSE:CVX), and ExxonMobil (NYSE:XOM) are all terrific companies that have pulled back in recent weeks, giving investors a buying opportunity before all three companies report earnings within a week of each other. ConocoPhillips is expected to report Tuesday, Oct. 29, and Exxon and Chevron will both report the following Friday, Nov. 1.

Oil derricks silhouetted against a setting sun.

Source: Getty Images.

A woe-is-me Q3

Several key geopolitical events hammered the third quarter for energy stocks. The fallout between the U.S. and Iran over the downed U.S. Global Hawk drone over the Strait of Hormuz set the precedent for a tense third quarter. The U.S. abstained from a retaliatory strike, choosing instead to launch a cyberattack on Iranian missile systems in addition to imposing new sanctions on Ali Khamenei, Iran's Supreme Leader, as well as top Iranian military commanders.

On Sunday, Sept. 15, coordinated strikes on Saudi Arabian oil facilities stripped the country of more than 5 million barrels per day of production capability, representing a 50% decrease in the amount of daily Saudi Arabian oil capacity. Today, Saudi Arabia has mostly recovered from the oil attack, restoring much of the country's production to increase global supply. Just a few weeks after the coordinated strikes, oil is actually lower than it was before the strikes, having shed more than 15% from its peak.

ConocoPhillips

Oil price volatility has been taxing on upstream producers like ConocoPhillips that have seen their stocks surge to early May highs only to plummet again in just a matter of weeks. Yet ConocoPhillips is truly different from other exploration and production companies. The company exhibits prudence when others chase the hottest play, and poise when investors question why ConocoPhillips isn't involved in the Permian as much as its peers. 

CEO Ryan Lance noted the company's patient and deliberate approach during the 2019 annual meeting of shareholders on May 14, 2019.

We can pay a growing dividend and sustain our production at less than $40 per barrel [West Texas intermediate, or WTI], and we can do that because we have a portfolio that doesn't have a lot of capital intensity. We have high margin production, and we have a relentless focus on the cost side of the business. Captured in our company today we have $16 billion barrels of resources that have a cost to supply that average less than $30 per barrel [WTI].

It's a good thing ConocoPhillips is pushing a contrarian strategy. Occidental Petroleum's (NYSE:OXY) acquisition of Anadarko makes Occidental the top Permian producer, ahead of even Exxon and Chevron. Yet Occidental's stock is hovering just above a 52-week low of $41.83 as producers struggle to achieve the same production from the Permian as they did in prior years.

The rationale for the production decline is simple. The best spots are taken first. From there, it's a downward spiral. Secondary wells, known as child wells, are drilled around the initial (parent) wells. These wells offer thinner margins and less production, as well as a decreased likelihood of success. Granted, the Permian is known for a healthy quantity of reserves, but decreasing margins are inevitable when drilling activity is at current levels. Margins are further squeezed as acreage costs go up. That's the case in the competitive Permian but less so in other plays where ConocoPhillips stakes its claim.

As of the company's Operation Update during its most recent earnings call, ConocoPhillips is focused on reducing its average cost per barrel across several global assets. ConocoPhillips has a diverse portfolio across Alaska, Canada, the United Kingdom, the lower 48 United States, Indonesia, Norway, Qatar, and Malaysia. All in all, it means 1,290 to 1,330 million barrels of oil equivalent per day (MBOED) for Q3 2019 guidance, representing 8% production per debt-adjusted share growth or 5% underlying growth.

Conoco Phillips now offers a dividend of more than 2% and trades at a mere P/E ratio of 8.65 P/E. The company's impressive $5.6 billion levered free cash flow is best in breed compared to its exploration and production peers. Levered free cash flow is a crucial metric to watch for capital intensive and often debt-burdened oil and gas companies.  

Company

P/E Ratio

Dividend Yield

Levered Free Cash Flow*

ConocoPhillips

8.7

2.3%

$5.6B

Chevron

14.7

4.2%

$14.0B

ExxonMobil

16.4

5.2%

$7.6B

Data as of market close Oct. 3, 2019. *Levered free cash flow is the cash available after a company has met its financial obligations. 

Chevron

Chevron has spent much of 2019 range bound between $111 and $126 per share, all the while paying a dividend that yields over 4%. The stock is currently trading near its low. Chevron has fallen nearly 10% since the strikes on Saudi Arabia proved less severe than initially thought.

Chevron's recent September 2019 investor presentation was chock-full of insights, most notably the near-term commitment to Chevron's upstream business. In 2Q 2019, Chevron achieved an astounding $14.45 adjusted earnings per barrel (EPB), 7.4% production growth, and unit production cost of $10.50 per barrel of oil equivalent (BOE). Those are impressive margins for Chevron considering it expanded its Permian assets to 16.2 billion barrels of oil equivalent (BBOE), up from 9.3 BBOE a year ago. Chevron's unconventional portfolio value has doubled between 2017 and 2019 thanks to land optimization, well performance, and better technology.

Chevron's confidence knows no bounds. In its most recent investor presentation, Chevron put all of its cards on the table, flashing the lowest net debt ratio at 13.5% and lowest 2019 cash flow breakeven at around $51 per barrel Brent between competitors BP, Shell, Total, and ExxonMobil. It's no surprise Chevron has been able to grow its unconventional upstream assets so rapidly: The company is spending $3.6 billion of its $20 billion capital and exploratory expenditures in the Permian alone, with another $1.6 billion in other shale plays.

Make no mistake, Chevron is incredibly sensitive to the threats of lower oil prices. That's why the company's downstream business has advanced in both efficiency and complexity, with an industry-leading earnings per barrel (EPB) of $2.66 and the highest-complexity refinery system with an NCI of 12.7. NCI stands for the Nelson Complexity Index, which is used to quote the sophistication of a refinery, with higher numbers indicating the ability to process and handle lower-quality fuels to produce more valuable products. High-NCI refiners are typically costlier to build and operate.

Chevron has a lower P/E ratio and nearly double the levered free cash flow of ExxonMobil despite the fact that Exxon has a 30% larger market capitalization than Chevron.

ExxonMobil

Exxon is the king of oil and gas Dividend Aristocrats. The largest United States supermajor has increased its dividend to a whopping $3.48 a share, representing a yield of more than 5%. Unlike Chevron's devotion to near-term cash flow, ExxonMobil plans on slowly staging its diverse portfolio of upstream, downstream, and chemical assets. Exxon currently produces around 400,000 barrels of oil equivalent per day from its Permian and Bakken Shale assets. The company hopes to increase that number to nearly 1.5 million by year-end 2025.

ExxonMobil is positioned nicely for long-term growth and short-term resilience. The company has the largest refinery portfolio of any supermajor and the third most barrels per day of refinery output of all U.S. oil and gas companies, behind only Marathon Petroleum and Valero. That means Exxon's downstream and chemicals businesses will benefit from lower oil prices, offsetting some upstream pain.

Exxon is a balanced energy company. It doesn't have the offshore investment that BP has or the LNG and gas investment of Shell or the upstream and downstream breakeven prices of Chevron, but it does have a little bit of everything. On top of that, the stock is within striking distance of its 52-week low, providing a nice entry point for investors looking to buy into an industry leader.

Now is the time to buy

ConocoPhillips, Chevron, and ExxonMobil are the kind of companies for which investors should wait for a pullback, buy, and then let the holdings ride for years to come. That's exactly what's happening now. All three stocks are within about 5% to 10% of their 52-week lows and close to 20% from their 52-week highs. All three stocks have strong cash flow, dividend growth, management commitment to share repurchases, and below-market-average P/E ratios. For investors looking to purchase reliable companies for the long term, these three stocks are for you.