Oil prices have been scorching hot this year. Crude prices are up roughly 30% on the year, thanks in large part to OPEC's support. The oil producing group recently agreed to continue lending a helping hand by holding back additional supply for another month.

That's giving oil stocks the fuel to rally as they're cashing in on higher crude prices. With that market backdrop in mind, we asked our contributors which ones are best positioned to capture this upside. They like what they see in ConocoPhillips (NYSE:COP), Royal Dutch Shell (NYSE:RDS.B), and Devon Energy (NYSE:DVN)

Two oil pumps with a bright sun in the background.

Image source: Getty Images.

Not as fast as expected

Reuben Gregg Brewer (Royal Dutch Shell): Royal Dutch Shell cut its dividend in 2020 and said it was moving down the path toward a cleaner future. Although that statement fits nicely with the current zeitgeist, the integrated oil giant isn't actually shifting gears as fast as you might think. For example, over the near term, the energy company only intends to put 10% to 15% of its capital spending directly into its renewable power business.    

Shell is actually getting some pushback from the carbon reduction crowd, including within the company's own ranks, that it isn't moving fast enough. But, with oil prices on the rise, that's actually a good thing for investors who believe a more moderate pace is the way to go. Simply put, Royal Dutch shell will continue to benefit from its energy business for longer.   

Shell's capital spending plans:

Category

Capital Expenditure

Marketing

$3 billion

Integrated Gas

$4 billion

Chemicals and Products

$3 billion to $4 billion

Upstream

$8 billion

Renewables and Energy Solutions

$2 billion to $3 billion

Total

$19 billion to $22 billion

Data source: Royal Dutch Shell. 

That, in turn, will make it easier for Shell to live up to some of its shareholder promises. For example, higher oil prices will make it easier to pay down debt. This includes using cash generated by the business and potentially higher valuations when it goes to sell oil-related assets. In addition, the company's 4% annual dividend growth pledge will be much easier to achieve if its oil business is thriving, with extra cash going toward buying back shares. All in, if oil prices stay high, the company and its shareholders benefit. And, at the same time, the cost of a slow and steady transition to clean energy will be that much easier to bear, too.

A well-timed deal to cash in on higher oil prices

Neha Chamaria (ConocoPhillips): I believe ConocoPhillips is a top stock to play the oil market rebound for two key reasons: solid cash-flow growth potential and value addition from a recent acquisition.

ConocoPhillips lost $2.7 billion in 2020, which isn't surprising given how the steep drop in oil prices drove the company's realized price down nearly 34% year over year. Yet ConocoPhillips generated $5.2 billion in cash from operations during the year, which when combined with $1.3 billion raised from the sale of non-core assets, was sufficient to fund its capital programs and cover its dividend payout and share repurchases.

Here's the best part: ConocoPhillips expects flat production in 2020 versus 2021 and aims to spend only around $5.5 billion in capital expenditures this year. So even if the price of oil doesn't move much higher from where it is today, ConocoPhillips should be able to generate significantly higher cash flows this year. On top of that, ConocoPhillips' recently completed acquisition of Concho Resources should start saving it costs and add to cash flows beginning this year. The deal was well timed, as ConocoPhillips could bag some lucrative low-cost assets for an attractive price.

With management striving to return at least 30% of its cash flows to shareholders, investors in ConocoPhillips can also expect higher dividends and share repurchases going forward. The stock already yields a generous 3.2% today. If ConocoPhillips stood out for its resiliency in 2020, the Concho acquisition positions it even better to ride out the volatility in the oil market, making it a compelling oil stock to consider.

An oil pumping unit at sunset.

Image source: Getty Images.

Unleashing a gusher of dividends

Matt DiLallo (Devon Energy): Surging oil prices usually cause oil companies to ramp up their drilling programs to grow their production. However, this year most are pledging restraint because OPEC is currently propping up the oil market to boost prices by holding back supply. Because of that, oil producers are on pace to generate a gusher of excess cash. Most will use that windfall to shore up their balance sheets.

However, Devon Energy plans to return a large portion of it to investors. The company recently implemented a variable dividend program that will send up to half of its excess cash flow to shareholders each quarter. The company recently paid its first one, which at $0.19 per share was more than double its quarterly base rate of $0.11 per share.

That payment appears to be just scratching the surface of Devon's dividend potential since crude prices continue heading higher. For example, it generated $267 million in excess free cash flow during the fourth quarter when oil averaged $42.65 a barrel. With crude oil recently approaching $65 a barrel, Devon should produce even more free cash, especially since it also expects to capture $575 million in annual cost savings by year-end as it benefits from its recent merger with WPX Energy. Because of that, Devon Energy investors appear poised to reap a windfall of dividends this year if crude oil prices continue surging, which could fuel big-time total returns. 

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.