Interest in the U.S. Oil Fund (USO -2.23%) has surged in recent weeks. Driving that enthusiasm is speculation that crashing crude prices will eventually rebound, taking this oil ETF up with them. Unfortunately, there are several flaws with that thesis, given the issues with USO.
Put simply, investors who want to bet on an oil market rebound should look elsewhere. Three better oil stock options are ConocoPhillips (COP -1.27%), EOG Resources (EOG -1.10%), and Pioneer Natural Resources (PXD 0.01%). Here's why.
A cash-rich oil stock
One of the biggest concerns with the U.S. Oil Fund is that it might not survive if oil prices go negative again. While the fund has adjusted its strategy to help reduce this risk, that doesn't mean another unexpected plunge won't incinerate its remaining value.
ConocoPhillips, on the other hand, isn't at risk of going out of business if oil prices crater again. That's because the company has one of the strongest balance sheets in the oil patch, including the second lowest leverage ratio and $8 billion in cash. It also has ultra-low-cost operations, with many of its resources profitable at sub-$30 oil. That means the company should be able to generate a gusher of cash flow when oil prices recover, which could fuel a big rally in its stock price.
A gusher of growth when crude tops $30 a barrel
EOG Resources is also in an excellent position to weather the oil market downturn. The company has a solid balance sheet, including $2.9 billion of cash at the end of the first quarter, against just $5.2 billion of debt. That provides it with lots of cushion against the impact of lower prices.
Meanwhile, the company has an extensive inventory of drilling locations that can fuel growth on a modest recovery in oil prices. EOG has identified more than 4,500 future wells that can deliver strong returns on investment at an oil price below $30 a barrel. The upside from those wells could enable it to quickly capture a rebound in oil prices. That leads EOG's CEO, Bill Thomas, to believe it's "well positioned to emerge even stronger in the recovery."
An enviable balance sheet
Pioneer Natural Resources has one of the best balance sheets in the oil sector, including the second lowest leverage ratio in its peer group. It also has a strong hedging program in place for a large portion of its oil production that's helping cushion the blow of lower prices. These factors put Pioneer in a strong position to weather this downturn.
Meanwhile, its financial strength and operational flexibility have it poised to quickly ramp up its drilling activities when oil prices rebound. The company is currently deferring some higher-cost output and building up an inventory of drilled but uncompleted wells that it can quickly bring online when oil improves. That provides it with leveraged upside into a recovery.
Why make a risky bet to match oil prices when safer options could fuel higher returns?
At best, USO will match a recovery in oil prices, though given the ETF's tracking issues and risk of implosion, that's no sure thing. On the other hand, ConocoPhillips, EOG Resources, and Pioneer Natural Resources could outperform crude oil prices, given their leveraged upside as they grow production. Add that to the higher likelihood that they'll survive this downturn thanks to the strength of their balance sheets, and they're much better options for those who want to speculate on an oil market rebound than USO.