One of the headline topics of 2022 has been rising energy prices. The abridged version of the story is that years of underinvestment paired with a crippling downturn in 2020 reduced the overall supply of oil and gas heading into the economic growth rebound of 2021. The war in Ukraine and Europe's push away from reliance on Russian oil and gas further strained supply and inflated energy prices. However, in the last six weeks, West Texas Intermediate (WTI) crude oil prices went from well over $120 per barrel to below $95 per barrel. In the same period, the energy sector is down over 23% compared to an 8% decline in the S&P 500

Chevron (CVX 0.12%) and ConocoPhillips (COP -0.18%) are two oil and gas stocks that have all sold off in recent weeks, but both look like great buys now. Here's why.

Silhouettes of two oil pumpjacks at sunset.

Image source: Getty Images.

The best all-around oil and gas major

Chevron CEO Michael Wirth has been caught in the spotlight as of late as he has publicly defended oil and gas producers against accusations that they are purposely keeping a lid on supply to retain high-profit margins. Chevron's argument is that even if oil and gas companies wanted to boost production, it takes time to make new investments and bring supply on stream. What's more, companies like Chevron have mid-term and long-term carbon-reduction goals. Ramping production to help ease pain at the pump may help the U.S. consumer. But it's a step in the wrong direction for climate change and goes against the strategic plans that Chevron has laid out.

That being said, Chevron has been arguably one of the slowest oil and gas companies when it comes to investing in low-carbon alternatives. Part of the reason is that Chevron has an excellent low-cost oil and gas portfolio that can outperform the competition even when oil and gas prices are low. This position was displayed in 2020 when Chevron lost less money than the other oil majors despite being the second largest by market cap behind ExxonMobil

CVX Net Income (Annual) Chart

CVX Net Income (Annual) data by YCharts

Chevron's European peers have made much more meaningful investments in solar and wind energy. By contrast, Chevron is lowering its carbon footprint by investing in hydrogen, and alternative fuels like diesel and natural gas produced from renewable feedstocks instead of fossil fuels. In this vein, Chevron is staying within its circle of competency, which makes sense given Chevron is a relatively risk-averse oil major keen on making sure bets and taking few chances on speculative plays. With a dividend yield of 4.1%, Chevron is an excellent integrated major to consider now.

ConocoPhillips' shareholders directly benefit from outsized profits

Like Chevron, ConocoPhillips operates one of the lowest-cost portfolios of its peer group. But unlike Chevron, ConocoPhillips is a pure-play exploration and production company, meaning it has more upside from sustained high oil and gas prices but also more risk.

However, ConocoPhillips makes up for a lot of that risk by having a portfolio that can be free-cash-flow positive even when WTI oil is $40 per barrel. Again, 2020 provides the perfect stress test for this claim. In 2020, WTI crude oil prices averaged $39.17 per barrel, according to the U.S. Energy Information Administration. In 2020, ConocoPhillips was free-cash-flow positive. Chevron was as well.

COP Free Cash Flow (Annual) Chart

COP Free Cash Flow (Annual) data by YCharts.

Investors may look at ConocoPhillips' $0.46 per-quarter, per-share ordinary dividend and argue that a 2.2% annual dividend isn't exactly a "high yield." And they would be right. However, ConocoPhillips recently introduced a variable return of cash (VROC) program that pays shareholders additional special dividends based on the strength of the company's earnings. Those dividends have been sizable. In the first quarter, ConocoPhillips paid a $0.30 per share VROC. And in the second quarter, it paid a $0.70 VROC. Add it all up, and the company distributed $1.92 in dividends in the first half of 2022 alone. If it keeps up that pace, its annual dividend yield is closer to 4% or 5%. The VROC offers investors a direct way to share in the upside of higher oil and gas prices. And ConocoPhillips' low cost of production means that if times get tough, the company is well positioned to support its ordinary dividend with free cash flow.

Efficient asset portfolios for boom and bust cycles

Chevron and ConocoPhillips have similar strategies that are based on limiting the damage of a particular downturn while also leaving room for upside during boom times. This cautious approach means that neither company will benefit from high oil and gas prices as much as higher-leveraged companies that take risker bets. However, when the market turns, Chevron and ConocoPhillips tend to be better positioned to not only limit losses but also make strategic acquisitions at bargain-bin prices.

Chevron bought Noble Energy in 2020 for what looks like a steep discount in hindsight. Similarly, ConocoPhillips completed its acquisition of Concho Resources in early 2021, which lowered its cost of production and expanded its Permian Basin acreage. Add it all up, and you have two high-yield dividend stocks that are teed up to have a solid second half of 2022 and beyond.