Oil prices have gone on a wild ride since Russia invaded Ukraine. They topped out well in the triple digits last summer before steadily declining in recent months on macroeconomic concerns.
However, while oil prices might be down right now, strong demand in China and growing supply issues could push them higher in the coming months. Because of that, now looks like a good time to consider buying oil stocks. Enbridge (ENB -0.36%), Devon Energy (DVN -0.90%), and Chevron (CVX -0.02%) stand out to a few Fool.com contributors as compelling opportunities right now.
More yield, less volatility
Reuben Gregg Brewer (Enbridge): Oil prices are notoriously volatile and there's nothing that any oil producer can do about that or its impact on top- and bottom-line performance. But investors can sidestep the inherent risk of falling oil and natural gas prices by owning a midstream company like Enbridge. It owns the infrastructure, like pipelines, that help to move energy around the world. The important piece of the story, however, is that it charges fees for the use of its assets. Thus, it tends to produce highly reliable cash flows through the energy cycle.
Dividend investors will like that, too, since those cash flows support Enbridge's 6.8% dividend yield. That's high on an absolute level and historically relative to the company's own yield history. To be fair, its dividend growth isn't likely to excite you, as low- to mid-single-digits growth is probably the best you should expect. But the dividend has been increased for a huge 28 consecutive years. Even if the yield does represent the bulk of your return, this story is likely to interest dividend investors trying to maximize their passive income stream.
And if you are worried about the future of carbon fuels, Enbridge has you covered there, too. It is building a clean energy business that is small today, at roughly 4% of earnings before interest, taxes, depreciation, and amortization (EBITDA), but is slated to grow materially over time. To put a number on that, the clean energy business is expected to get roughly 20% of the company's capital spending on an annual basis despite its diminutive size.
Taking advantage of the decline
Matt DiLallo (Devon Energy): Shares of Devon Energy have fallen along with oil prices in recent months. They're currently down more than 35% from their 52-week high.
The company's management team believes this sell-off is an attractive buying opportunity, and it's buying back shares.
CEO Rick Muncrief stated on the first-quarter conference call, "We continue to see attractive value in repurchasing our shares, which we believe traded [at] a significant discount to our intrinsic value." The CEO continued: "To capitalize on this compelling opportunity, we made substantial progress advancing our buyback program by repurchasing $692 million of shares year to date. In addition to our corporate buyback activity, multiple members of our management team, myself included, have also demonstrated their conviction in Devon's value proposition by purchasing stock in the open market over the past few months."
The company recently boosted its share repurchase authorization by 50% to $3 billion. That gives it more flexibility to buy back additional stock this year.
Meanwhile, Devon's falling share price has the stock trading at an attractive dividend yield even though its payout has declined along with its oil-fueled cash flows. Devon's most recent fixed-plus-variable dividend payment put its annualized yield at 5.7%, 6 times higher than the broader market.
While the company's dividend payments have fallen, they could rebound if oil prices bounce back. Given the current supply-and-demand situation, oil prices appear primed to rally. That could give Devon Energy's stock the fuel to soar. Because of that, it's worth a closer look right now.
Focused on shareholder returns
Neha Chamaria (Chevron): Shares of Chevron have fallen in recent months and are now off about 17% from their 52-week highs. It's easy to guess why the oil stock's down: Chevron is an upstream oil and gas producer, and its profits and cash flows, therefore, are directly correlated to oil and gas price, which are down this year.
Chevron, however, has successfully navigated challenging times through the decades and rewarded long-term shareholders richly. Dividends have played a crucial part in the stock's total returns. Chevron is a dividend growth stock, having increased its annual payout for 36 consecutive years now. Earlier this year, Chevron announced a 6% hike in dividend per share.
Regardless of where oil prices are, Chevron remains on solid footing. The oil and gas giant generated $4 billion in free cash flow (FCF) during the first quarter, and although it was down from the year-ago period, it was only because Chevron's capital expenditures were 55% higher year over year in Q1, driven by investments in the U.S., including a large carbon storage project.
Chevron ended Q1 with a cash balance of $15 billion, but management emphasized on the conference call how the company needs only $5 billion to run the business. Since it also already has a strong balance sheet, Chevron intends to return the surplus cash to shareholders.
In other words, Chevron can run its day-to-day operations, invest in growth, and still have enough cash to pay you dividends even if oil prices plunge. The company also just announced it will acquire PDC Energy in an all-stock deal worth $7.6 billion, and expects the acquisition to add $1 billion in FCF at Brent crude price of $70 per barrel and Henry Hub natural gas price of $3.5 per Mcf. That gives investors yet another reason to consider this Warren Buffett stock now.
