Oil prices have been scorching hot this year. Crude is up by more than 30%, fueled by the gradual reopening of the global economy and OPEC's support by holding back supplies. Those higher prices have been a boon for most oil stocks.
Some oil companies are thriving more than others thanks to their lower operating costs and unique strategies. Three that stand out to our energy contributors for their ability to prosper on higher oil prices are Total (NYSE:TOT), ConocoPhillips (NYSE:COP), and Devon Energy (NYSE:DVN).
This cash cow keeps giving
Reuben Gregg Brewer (Total): One of the biggest reasons to like French integrated oil giant Total is that it is charting a middle ground course toward the energy future. Basically, it is growing what it calls its "electrons" business, but also continuing to expand its oil and natural gas operations. And, all the while, it's promising to support its dividend (and peer-leading 6.5% dividend yield) so long as oil prices average $40 per barrel or higher.
The key to the entire puzzle is that the oil and gas operations are being used to supply the cash Total needs to fund its deliberate, and slow, clean energy shift. That has worked out quite well, with the company reporting that first-quarter 2021 oil prices were up 22% year over year. Net income per share increased a huge 68%, to $1.10 per share. And cash flow from operations went from $1.3 billion to $5.6 billion. Clearly, Total is benefiting as energy prices rise and that's probably what investors are most focused on, noting that the stock price has risen by a third over the past year.
But don't lose sight of the long-term goals here. The big-picture plan is for Total to slowly shift its business along with the world's increasing demand for clean energy and electricity. It's great news that financial results have improved along with energy prices. It's even better news that this will make it easier for the company to fund its long-term clean energy goals. So it is thriving today for sure, but that will also help it to thrive in a very different tomorrow.
Minting money from oil
Neha Chamaria (ConocoPhillips): During its recent first-quarter earnings conference call, ConocoPhillips' management emphasized how the company is positioned to benefit from higher oil prices for multiple reasons, including unhedged contracts and exposure to diverse global markets. The company's average realized price of $45.36 per barrel of oil equivalent (BOE) in Q1 was 17% higher year over year, which is one reason why it could generate $2.1 billion in cash from operations during the quarter despite a $1 billion hit from one-time charges and losses on unwinding of hedges acquired from Concho Resources.
ConocoPhillips is, in fact, so confident about generating strong cash flows going forward that it has plans to pare down debt by $5 billion over the next five years. The oil giant's confidence in its cash-flow generating capabilities was already visible when it became one of the first and few oil companies to resume share repurchases after suspending them last year.
ConocoPhillips announced deep production cuts in 2020 even as other oil companies continued to drill. It continues to maintain a cautious approach and is limiting production and capital expenditures this year. This proactive approach, along with the timely purchase of Concho Resources earlier this year, didn't just help ConocoPhillips ride out the storm, but has positioned it to earn boatloads of cash as the economy reopens and oil prices rise.
Thanks to the Concho acquisition, management foresees significant upside to its cash flows, especially in a rising oil price environment. Clearly, ConocoPhillips is thriving, and investors should watch out for the company's 2021 outlook and capital allocation plans at its upcoming market update meeting on June 30.
The right strategy for higher oil prices
Matt DiLallo (Devon Energy): Devon Energy has been on fire this year. Shares of the oil producer are up more than 55%, fueled in part by its innovative strategy.
Devon spent the past several years reshaping its operations. It repositioned around the lowest-cost production basins in the U.S. while taking additional steps to reduce costs, including merging with WPX Energy. These strategic moves have driven down Devon's cost structure so that it can generate a gusher of cash flow now that oil prices are higher.
However, instead of using those funds to chase production growth, Devon uses them to shore up its balance sheet and return additional money to investors via its innovative variable dividend program. The company recently declared its second straight incremental payout. At $0.23 per share, it was more than double the company's fixed base dividend of $0.11 per share each quarter. Moreover, the combined payout was 13% above what Devon sent back to its investors the prior quarter.
That income stream will likely continue rising. Fueling that view is Devon's ongoing cost savings program, which has it on track to reduce its annualized expense by $600 million by year-end. Devon should generate more free cash as costs continue falling even if oil prices don't continue rising. That will provide it with additional funds to pay out via its variable dividend program. Those future payouts should give Devon's stock the fuel to continue thriving.