Oil prices have rocketed higher over the past year. The benchmark West Texas Intermediate (WTI) price has soared more than 60% to over $100 a barrel. Because of that, oil stocks are cashing in on surging crude prices.
However, some oil stocks have more upside exposure to crude oil than their rivals because of their hedging strategy. One oil producer with completely uncapped upside to the rise in oil prices is ConocoPhillips (COP +2.76%). That makes it stand out as my top oil stock to buy right now.
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Completely unhedged upside potential
Many oil producers utilize hedges to protect their downside from falling prices. However, they give up some of their upside in exchange. Several large U.S. oil producers will record hundreds of millions of dollars in hedging losses this year at oil prices above $80 a barrel.
That's not the case for ConocoPhillips, which is one of only two U.S. oil producers in its peer group that doesn't utilize any oil hedging contracts. It prefers to take market prices for its crude oil production. Because of that, it has lots of leverage to higher oil prices. For example, every $1 per barrel change in the average WTI oil price will impact its annualized cash flow by $105 million to $115 million. With crude prices currently up $25 a barrel from the beginning of the year, ConocoPhillips' cash flows are rising sharply.
The company also receives additional income from contingent payments on assets it sold in recent years when oil and gas prices were lower. These payments trigger when oil and gas are above a certain price and provide millions of dollars in additional cash flow each month that rises and falls alongside oil and gas prices. With both surging this year, ConocoPhillips is collecting a growing stream of these contingent payments. While its oil-based contingency payment will end next month, the company can continue collecting that gas one through the end of next year, capped at $300 million.
NYSE: COP
Key Data Points
Returning the growing gusher to shareholders
ConocoPhillips plans to return a large portion of its cash flow windfall to investors. In December 2021, the company unveiled a plan to return $7 billion in cash to shareholders in 2022, 16% more than it sent them last year. It set a three-tiered return-of-capital framework to accomplish this goal:
- Make fixed quarterly dividend payments of $0.46 per share, which will total roughly $2.4 billion.
- Repurchase around $3.5 billion in stock.
- Pay a variable return of cash (VROC) totaling another $1 billion in quarterly installments. It set the first payment at $0.20 per share.
With oil prices continuing to rise, ConocoPhillips already added another $1 billion to its capital return plan in February, which it aims to split between share repurchases and the VROC. As a result, it boosted its second VROC payment to $0.30 per share.
Crude prices have continued to rise since that time. Because of that and ConocoPhillips' uncapped upside to higher prices, the company could return even more cash to investors this year. That could come through with additional share repurchases and a bigger VROC. Meanwhile, the company will likely announce another increase in its fixed quarterly dividend sometime later this year.
However, these growing cash returns are only part of the story. ConocoPhillips' rising cash flow and steadily falling outstanding share count from the buybacks should help fuel healthy share price appreciation. While the stock is already up nearly 30% this year, shares are about 15% off their high because crude prices have come down from their peak. If oil heats back up, it could provide more fuel for ConocoPhillips' stock to rise.
The best leverage to higher crude prices in the oil patch
ConocoPhillips stands out from its peers because it hasn't hedged any oil production. Because of that, it has unlimited upside to higher crude prices this year. That's giving it more cash to return to shareholders. This combination of rising cash flow and cash returns could provide the stock with the fuel to continue producing attractive total returns. That makes it stand out to me as the top oil stock to buy right now.
