This past year has been a fascinating one for the oil market. Crude prices rocketed into the triple digits following Russia's invasion of Ukraine. However, they've since given back most of those gains on concerns that rising interest rates to combat inflation will drive the economy into a recession next year, denting oil demand. Despite all that volatility, most oil stocks have surged this year as investors realize that fossil fuels remain vital to fueling the economy.
Given that backdrop, it's difficult to know what will happen in the oil patch in 2023. However, a few Fool.com contributors believe that some oil stocks stand out as great buys heading into the new year. Here's why they think investors should scoop up shares of Kinder Morgan (KMI -0.61%), Phillips 66 (PSX -3.42%), and Chevron (CVX -0.43%) before the end of this year.
Regaining trust in the income story
Reuben Gregg Brewer (Kinder Morgan): It is completely understandable if conservative income investors chose not to buy Kinder Morgan after its 2016 dividend cut. The big issue was that, just a couple of months prior to the cut, management was talking about dividend increases in 2016. There's a legitimate trust issue there. However, since that point, Kinder Morgan has been working hard to regain investor trust.
A big part of that has been regular annual dividend increases since 2018. And while Kinder Morgan's dividend increase in 2020 was smaller than management had promised (another blow on the trust front), management specifically stated that the decision was related to dividend safety. In 2016 the problem was too much leverage. So it looks like the North American midstream giant realizes that dividend consistency is the key issue for investors, highlighted by the fact that distributable cash flow covered the dividend by roughly 1.7 times in the third quarter of 2022. There's ample room there to increase the payment and to absorb adverse events.
All of this plays into Kinder Morgan's business, as well. It owns the pipelines, storage, processing, and transportation infrastructure that helps to move oil and natural gas around the world. Most of its business is driven by fees, which means that commodity prices don't play a huge role on the top or bottom line. It is exactly the kind of company you would expect to pay a reliable dividend. Now that management is more on board with that, the generous 6% or so dividend yield is probably worth a closer look, but only if you can look past the 2016 cut.
Big things to come
Matt DiLallo (Phillips 66): Phillips 66 recently outlined big plans to return even more cash to its shareholders in 2023 and beyond. The diversified energy giant aims to send its investors an additional $10 billion to $12 billion by the end of 2024 via dividends and share repurchases. That will add to the more than $30 billion it has already returned to investors since its formation a decade ago.
The company has already authorized a $5 billion increase in its share repurchase authorization. Meanwhile, it boosted its dividend by another 5% earlier this year and has given investors 11 raises in 10 years. More dividend growth seems likely over the next few years, making its 3.8%-yielding payout attractive for income-seeking investors.
Fueling Phillips 66's increased capital return plans is a strategy to grow its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by $3 billion over the next three years. A third of that will come from its plan to acquire the remaining stake in DCP Midstream that it doesn't already own. The company boosted its interest in that master limited partnership (MLP) in a deal with Canadian energy giant Enbridge in exchange for cash and a stake in an oil pipeline. Phillips 66 hopes to seal a deal to buy the rest of the MLP from outside investors so it can capture the anticipated $1 billion of EBITDA accretion it predicts it will see by integrating its operations. The company also expects sustainable cost savings from its business transformation and incremental income from expansion projects to boost its earnings.
That combination of earnings growth and increased shareholder returns should give Phillips 66's stock the fuel to head higher over the next few years. That makes it a great oil stock to buy before the end of this year so that investors can capitalize on this upside opportunity.
A Dividend Aristocrat you won't regret owning
Neha Chamaria (Chevron): While it's hard to predict where oil prices may head next, you still want to consider buying an oil stock now that has its fortunes tied closely to oil prices. This oil stock, though, is also a dividend stalwart, and most likely to announce a good dividend hike in early 2023 now that it's on track to generate record cash flows this year. I'm talking about Chevron, which has increased its dividend every year for 35 consecutive years now.
Chevron is on solid footing right now, having used its incremental cash flows to repay debt for several quarters now while also investing in growth. In the third quarter, for example, Chevron's production from the Permian Basin was up 12% year over year. In between, Chevron also invested in its new energy, low-carbon businesses to adapt to the changing times.
Chevron just announced its capital budget for 2023, and it expects to spend 25% more, or $14 billion, on organic growth next year versus 2022. The oil giant believes this spending should help lower carbon and deliver higher returns in the coming years, which should eventually help it return more cash to shareholders through dividends and share repurchases.
The framework works in investors' favor, as Chevron's stable and growing dividends can hugely help investors navigate any volatility in the oil markets. With Chevron shares losing steam in recent weeks on lower oil prices, this 3.3%-yielding stock looks like a solid oil dividend stock to buy right now, especially with a dividend hike around the corner.
