Many oil industry expects expected that oil prices would rally this year, potentially topping $100 a barrel again. Tightening supplies and resurgent demand should have put upward pressure on crude. Instead, oil is down more than 10% this year to around $70 a barrel. As a result, many oil bulls are throwing in the towel, cutting their price targets.
While there's a lot of uncertainty about oil prices, many oil companies built their businesses to thrive in these types of market conditions. ExxonMobil (XOM -2.78%), Enbridge (ENB -1.21%), and Devon Energy (DVN 0.19%) stand out to a few Fool.com contributors as oil stocks that can create value for shareholders amid a murky oil market.
Ready for anything
Reuben Gregg Brewer (ExxonMobil): Energy prices are prone to dramatic swings, which is just par for the course. The best companies in the energy sector know this and adjust accordingly.
Integrated energy giant ExxonMobil is just such a company. The proof of its ability to survive the cyclical nature of the energy sector comes from its more than 40 years' worth of consecutive annual dividend increases.
That dividend is supported by a rock-solid balance sheet, with an ultra-low debt-to-equity ratio of roughly 0.2 times. While the 3.4% yield may not be huge, often it's better to err on the side of caution than to reach for yields that end up being unsupportable. However, the debt-to-equity ratio, which is a measure of leverage, needs a bit more discussion.
XOM Debt to Equity Ratio data by YCharts
A strong balance sheet is something of a relief valve for Exxon. When oil prices are low, it takes on more debt (increasing leverage) so it can fund its business and keep paying the dividend. When times are good again, it trims debt (reducing leverage) and prepares for the inevitable next industry downturn.
But throughout the cycle it continues to build for the future, focusing on maintaining or growing its production. For example, production rose around 4% year over year in the first quarter of 2023, at least partly thanks to debt-funded spending that was taking place when oil prices plunged during the early days of the pandemic in 2020.
The graph showing Exxon's leverage versus Brent crude oil prices speaks volumes. If you are looking for a long-term holding in the energy patch, Exxon should be on your list.
Making money regardless of crude prices
Matt DiLallo (Enbridge): Enbridge operates the world's longest, most complex crude oil pipeline system. It moves 30% of all the oil produced in North America.
Despite that significant exposure to the oil market, oil prices don't really matter to Enbridge. That's because it gets 98% of its revenue from stable cost-of-service agreements or long-term contracts. Those sources supply very predictable cash flow throughout the oil market cycle.
The company pays investors 60% to 70% of its steady cash flow via a dividend currently yielding around 7%. It retains the rest to help finance expansion projects.
The bulk of those expansions is on lower-carbon projects to reduce its exposure to the oil market. It has grown into a leading natural gas infrastructure company. It also has an emerging clean energy business. These investments in lower-carbon energy will help sustain and grow Enbridge's cash flows.
The company's stable base business and extensive expansion project backlog give it lots of visibility into future growth. Enbridge expects its cash flow per share to grow by about 3% annually through 2025 and then by around 5% annually over the medium term. That will give the company ample fuel to continue growing its dividend, which it has done in each of the last 28 years.
Enbridge's insulation from the impact of crude oil prices makes it a great way to gain exposure to the overall growth in oil demand without dealing with volatility. It pays an attractive and growing dividend, providing a nice, low-risk return.
A well-funded high dividend yield
Neha Chamaria (Devon Energy): Devon Energy shares have fallen steadily in 2023 so far in the wake of lower oil prices and dividends. Devon Energy doesn't just pay a fixed base dividend every quarter like most oil stocks -- it also pays a variable dividend based on the cash flows it generates during the period. However, with low oil prices hitting its cash flows this year, Devon Energy's total dividend payout too has declined in recent quarters.
Yet there are solid reasons why investors in oil should find Devon Energy stock attractive right now. I'll give you two of them.
First, even though Devon Energy's total dividends have fallen lately, few companies can afford to pay a variable dividend over and above a fixed dividend every quarter. It is also one of the highest-yielding oil stocks now, offering a hefty dividend yield of 9.2%.
Second, Devon Energy's dividends are well funded. For example, Devon Energy estimates it can generate enough cash flows to fund its capital spending for 2023 even at a crude oil price as low as $40 per barrel. That should leave the company with ample cash to pay big dividends even in a weak oil-price environment.
To add further to the argument in favor of Devon Energy stock, the company's management is aggressively buying back shares, as it believes the stock is trading at a "significant discount" to its intrinsic value. An undervalued stock is one of the primary reasons why a company repurchases shares, and if done right, such stock buybacks eventually create value for shareholders. Given Devon Energy's financial standing and dividend policy, the stock does look like a value buy now.
