With Giant Oil Mergers Upending the Energy Industry, Here Are 3 Investment Options to Consider Today

ExxonMobil (XOM -2.78%) kicked off what appears to be the next wave of merger and acquisition activity in the oil patch by agreeing to a more than $60 billion megadeal for Pioneer Natural Resources. That deal already sparked another transaction. Meanwhile, several other oil companies are reportedly on the prowl for their next acquisition.

The oil market merger wave could dramatically alter the industry. It could also produce some big winners. ExxonMobil, Devon Energy (DVN 0.19%), and ConocoPhillips (COP 0.10%) stand out to a few Fool.com contributors as some of the oil stocks best positioned to capitalize on the sector's consolidation. Here's why they think investors should consider buying them today.

Exxon has the wherewithal to roll things up

Reuben Gregg Brewer (ExxonMobil): With the announcement of the $64.5 billion acquisition of Pioneer Natural Resources, ExxonMobil was the first U.S. oil major to strike a huge, industry-consolidating deal. The benefit to Exxon is that it increases its exposure to U.S. onshore oil and natural gas production in an area where it already has a relatively modest presence. In other words, it gains scale in an important region to complement its other U.S. production assets, making the company's domestic business that much stronger.

But it's important to remember something about Exxon: The company is an industry Goliath, sporting a market cap of around $420 billion. Sure, buying Pioneer is a sizable transaction, but it's well within Exxon's capacity to seal this deal. As the world increases its use of clean energy, meanwhile, scale will probably become more important across the oil and natural gas industry. Being able to produce these still vital commodities at a low cost and from the best locations will start to matter more. Exxon has the capacity to change its production portfolio as needed through acquisition and disposition activity.

So if you're looking at the big deals that Exxon and peer Chevron just inked, one very clear option is to lean in and simply stick with the big-name consolidators. And Exxon, with a strong balance sheet and 41 years of annual dividend increases under its belt, is among the best positioned energy stocks to keep rolling up an industry that's facing shifting world demand.

Poised to make a needle-moving deal

Matt DiLallo (Devon Energy): Devon Energy is no stranger to mergers. It completed a transformational $12 billion merger of equals transaction with WPX Energy in 2021, becoming the company it is today. That deal created a leading oil and gas producer, enhancing its scale and ability to generate free cash flow. It served as the springboard for Devon to launch the industry's first fix-plus-variable dividend framework.

Devon made a couple of bolt-on deals last year to enhance two of its core regions. The energy company spent $865 million to acquire the leasehold interest and related assets of RimRock Oil & Gas in the Williston Basin. It followed that up by agreeing to acquire Validus Energy for $1.8 billion to bolster its position in the Eagle Ford. Those highly accretive deals boosted Devon's free cash flow.

I think Devon Energy will make another deal soon. According to Bloomberg, it has held preliminary merger talks with Marathon Oil and looked into acquiring CrownRock. A merger with Marathon Oil would be highly complementary because they operate in many of the same basins. Meanwhile, a deal with CrownRock would enable Devon to bolster its position in the Permian.

At the right price, a deal for either of those oil companies or another producer could be transformational for Devon. If it follows the blueprint of its WPX merger, the company will find a deal that increases its scale, free cash flow, and growth profile. That would allow the company to create more shareholder value through higher dividends and continued share repurchases.

Well positioned to grow

Neha Chamaria (ConocoPhillips): ConocoPhillips just released its quarterly numbers, and one number that stood out is the oil and gas producer's war chest. ConocoPhillips is flush with cash; it generated cash from operations worth nearly $16 billion in the first nine months of 2023 and ended the period with a cash and cash equivalents balance of around $9 billion. I wouldn't be surprised if ConocoPhillips uses some of that cash on mergers and acquisitions.

On its third-quarter earnings conference call, CEO Ryan Lance said he expects consolidation in the industry to continue, although ConocoPhillips itself has a "high bar" for mergers and acquisitions given the importance the company places on "returns-focused value proposition." Lance reiterated how ConocoPhillips is always "looking and trying to be opportunistic" and is keen to acquire assets if it finds an opportunity.

In October, the company bought a remaining stake in Surmont oilsands in Alberta from TotalEnergies for around $2.7 billion in cash, and it believes this acquisition will lower its free cash flow (FCF) breakeven and deliver "significant" FCF in the coming decades. In fact, ConocoPhillips has even raised its full-year production guidance thanks to the acquisition.

Given the oil giant's strong financial standing and steady cash-flow growth, investors in oil and gas may want to consider ConocoPhillips stock as it continues to grow its asset base organically and through acquisitions. The company also just raised its dividend by 14%, making it an oil and gas stock worth your money.