The oil industry is coming off one of its best years in quite some time. Oil prices rebounded sharply as the global economy recovered from the pandemic and producers maintained a tight lid on supply. These strong market conditions should continue in 2022 and beyond because the world needs oil despite its shift toward cleaner energy sources.
With this backdrop, we asked some of our Fool.com contributors for their favorite oil stocks to own in 2022 and beyond. Here's why they chose TotalEnergies (TTE 0.52%), ConocoPhillips (COP 0.39%), and Devon Energy (DVN 0.84%).
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Preparing for the future
Reuben Gregg Brewer (TotalEnergies): If you are looking for an oil stock, you could go with a pure play exploration and production name. Or, if you are a bit more conservative, you would likely select an integrated energy company with assets that span from drilling (upstream) to refining and chemicals (downstream). I'm conservative, so this is my preference. But there's more to the story here because some oil majors, like ExxonMobil (XOM 0.39%) and Chevron (CVX 0.57%) are sticking to the oil patch, while others, like my favorite, TotalEnergies (TTE 0.52%), are looking to slowly shift their portfolios toward clean energy.
TotalEnergies isn't alone; peers Royal Dutch Shell (RDS.B) and BP (BP 0.98%) are also using their oil profits to fund clean energy investments. However, of this trio, only TotalEnergies is going down this road without a dividend cut. And it isn't giving up on oil and natural gas, with a goal of growing both its energy business (with a shift toward cleaner-burning natural gas) and its "electrons" business at the same time. That lets me own a growing energy business and a growing renewable power business with one single investment.
TTE Dividend Yield data by YCharts
Meanwhile, I am collecting an industry-leading 6% dividend yield while this diversified oil company prudently adjusts with the world around it. It's a bit of a punt option but one that lets me sleep well at night in a sector that is prone to volatility in the best of times and today is facing something of an existential crisis.
Returning the windfall to investors
Matt DiLallo (ConocoPhillips): Oil giant ConocoPhillips has taken several steps in recent years to reduce costs to generate more cash flow. Its latest move was acquiring Shell's assets in the Permian Basin to boost its scale in that low-cost oil basin. This strategy is paying big dividends for investors.
ConocoPhillips expects to return $7 billion to shareholders in 2022. That's 16% higher than last year's total. It set a three-tiered program to send money back to investors:
- The base quarterly dividend: ConocoPhillips increased its quarterly dividend payment by 7% to $0.46 per share late last year. At the current share price, the dividend yield is 2.4%, almost double that of the S&P 500. At the current rate, the company will pay $2.4 billion of dividends this year.
- Share repurchases: ConocoPhillips expects to repurchase $3.5 billion of its shares this year, with $1 billion funded by selling its remaining shares in Cenovus Energy.
- Variable return of cash: ConocoPhillips plans to distribute about $1 billion of additional cash to shareholders via a variable return of cash. It anticipates making these payments quarterly, with the first one set at $0.20 per share.
Overall, ConocoPhillips expects to return more than 30% of its anticipated cash flow to shareholders in 2022 and anticipates delivering low single-digit production growth in 2022. It will allocate the rest of its cash to expand its operations, reduce emissions, and maintain a top-tier balance sheet. That focus on growing its cash flow and returning it to shareholders is why ConocoPhillips is my favorite oil stock to own for the coming years.
Industry-beating dividends
Neha Chamaria (Devon Energy): Devon Energy started paying out the oil industry's first fixed-plus-variable dividend in 2021. The company adopted a policy of topping up a fixed dividend with a special dividend equivalent. The amount is up to 50% of the cash flows left after paying out capital expenditures and a fixed dividend in any given quarter. That dividend policy hugely helped boost shareholder returns last year; the company paid out $1.97 in total dividends per share in 2021 versus only $0.68 per share in 2019.
Shareholders can continue to expect strong returns from Devon Energy this year. The thing is, oil prices are holding up firm for now thanks to multiple factors, including supply disruption from Libya as the country put key pipelines under repair and declared force majeure on oil exports. Also, OPEC is sticking with its plan to increase oil production only gradually per month. That's good news for Devon Energy shareholders as the company's cash flows, and therefore variable dividend, depend on oil prices.
Even if oil prices were to fall, Devon Energy is on solid footing, having kicked off 2021 with an all-stock merger with WPX Energy and then using the rest of the year to repay debt and fortify its balance sheet. With the price of West Texas Intermediate (WTI) crude at $75 per barrel, Devon Energy foresees its cash flows growing more than 35% in 2022. At that pace, its total dividend could potentially grow by almost 80% this year over 2021. That's huge, and when combined with the oil stock's latest share repurchase program, could translate into solid returns for shareholders.
