Oil prices have been all over the map this year. Crude recently dipped below $90 a barrel, well off its high in the $120s. Oil's next step is anyone's guess. While a global recession could take it lower, supply constraints have some analysts foreseeing a return to the recent peak.
Even if crude prices continue cooling off, most oil stocks are minting cash these days, making the sector look like an attractive investment, especially given its upside potential. Three oil companies that our energy contributors think look like no-brainer investments in the current environment are TotalEnergies (TTE +0.00%), Chevron (CVX 2.21%), and ExxonMobil (XOM 3.65%).
NYSE: TTE
Key Data Points
Oil is going away slowly
Reuben Gregg Brewer (TotalEnergies): TotalEnergies' generous 5.5% dividend yield will definitely interest dividend investors. It is the highest of the company's closest integrated energy peers. You'll also like that this European giant maintained its dividend throughout the oil downturn in 2020, unlike competitors BP and Shell.
Oil prices have recovered from those lows, yet remain quite volatile, noting that Brent Crude is down nearly 25% from recent highs. TotalEnergies' stock price is about 15% off its recent peak and below its pre-pandemic levels, even though oil prices are notably higher than their pre-pandemic levels. There's a mismatch here.
You see, BP and Shell cut their dividends when oil prices were low and announced they would aggressively expand their clean energy operations. The dividend cuts helped free up cash for that move but changed the investment equation.
TotalEnergies announced a similar clean energy shift but believed oil prices would recover in time to both maintain its dividend and invest in a cleaner future. TotalEnergies was clearly correct in that assessment, so the income story here hasn't altered at all.
Now that prices are higher again, TotalEnergies is happily growing both its carbon and clean energy operations. Effectively, the company is pragmatically shifting with the world. It's an appealing compromise between today and tomorrow. U.S. investors will pay French taxes on the dividend, and dividends received will fluctuate with currency rates. But if you are interested in oil stocks and still want to hedge your bets about a clean energy future, this high-yield name is a standout.
NYSE: CVX
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No need to overthink things
Matt DiLallo (Chevron): Oil giant Chevron is about as close to a no-brainer oil stock investment as there is nowadays. It's an industry behemoth that can withstand the oil sector's ups and downs.
Chevron's currently capitalizing on the industry's upcycle. The oil giant has produced $22.2 billion of cash flow from operations in the first six months of this year, nearly double the $12.2 billion it generated last year, thanks to higher oil prices. Meanwhile, free cash flow was over $10 billion in the second quarter alone.
Chevron wisely allocates this cash across its four financial priorities. It continues to increase its dividend, delivering its 35th consecutive annual boost to the shareholder payout earlier this year. The dividend payment has risen 20% since right before the pandemic and doubled since 2010. That's impressive, considering the turmoil in the oil market during this time. Chevron also continues to invest in traditional and new energy sources, strengthen its already top-tier balance sheet, and repurchase shares.
The company's ability to generate cash and adeptly allocate capital has drawn the attention of Warren Buffett. His Berkshire Hathaway has been gobbling up shares of Chevron and currently owns over 8% of its outstanding stock -- worth over $25 billion. While investors shouldn't blindly buy stocks Buffett purchases, his stamp of approval is worth noting.
With crude prices currently in the high $80s, Chevron should continue producing a gusher of cash to allocate across its financial priorities. Meanwhile, its top-tier balance sheet and integrated operations will help reduce risk if crude prices continue falling. Add in its upside if oil rebounds, and it's an easy choice for investors seeking some exposure to the oil patch this month.
NYSE: XOM
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A stronger oil giant in the making
Neha Chamaria (ExxonMobil): ExxonMobil stock is a typical favorite when oil prices rise, but the oil giant is at a place right now where buying its shares is a no-brainer, even in a falling oil-price environment.
Here's the thing: ExxonMobil knows how to navigate the storms, thanks to its rich 100-plus years of experience in the oil and gas sector, and it's more than just an upstream oil stock. ExxonMobil is one of the largest integrated companies in the world and generated around 68% of its cash from operations last year from upstream. The remaining came from its downstream, chemical, and other operations.
Most importantly, ExxonMobil is aggressively cutting costs -- expecting to save nearly $9 billion in annual costs by 2023. Thanks to cost reduction, the oil giant brought down its break-even oil price in 2021 to only $41 per barrel. Put another way, at oil prices as low as $41 per barrel, ExxonMobil should be able to generate enough cash flows to cover its capital expenditures and dividends. ExxonMobil not only pays regular dividends but also is a Dividend Aristocrat, having increased its dividend every year for 39 consecutive years now.
By 2027, ExxonMobil is targeting a breakeven of only around $30 per barrel of oil. If the oil major can achieve the goal by 2027, its earnings and cash flows by then could double from 2019 levels. That sounds really compelling, and with ExxonMobil also likely to deliver yet another set of strong numbers in October, oil investors have solid reasons to add the stock to their portfolios this month.
