Oil prices have been on a downward spiral this year. WTI, the primary U.S. oil price benchmark, has fallen over 13% through the end of the third quarter, putting it down near $60 a barrel. That's well off its peak above $80 a barrel in early January.
Despite the slump in crude prices, three top oil stocks -- ConocoPhillips (COP 0.87%), Diamondback Energy (FANG 2.48%), and EOG Resources (EOG -0.04%) -- stand out for their ability to generate robust cash flows at current prices. That's one of the many features that make them attractive investments even as crude prices drop toward $60.
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Built for lower oil prices
In commenting on the decline in oil prices on the first-quarter conference call earlier this year, ConocoPhillips CEO had this to say:
ConocoPhillips is built for this, with clear competitive advantages. We have a deep, durable, and diverse portfolio. We have decades of inventory below our $40 per barrel WTI cost-to-supply threshold, both in the US and internationally.
The company's low operating costs and vast inventory of low-cost supplies allow it to thrive in the current environment. ConocoPhillips is producing plenty of cash, giving it the money to invest in growing its business while returning vast sums to shareholders. For example, the company generated $4.7 billion in operating cash flow and $1.4 billion in free cash flow during the second quarter, when WTI averaged less than $64 per barrel. ConocoPhillips was able to return $2.2 billion in cash to investors during that period, thanks in part to its cash-rich balance sheet.
Meanwhile, the company's already robust cash flows will improve in the coming quarters even if oil prices don't bounce back. Higher distributions from its investment APLNG, tax benefits from the One Big Beautiful Bill Act, and lower capital spending will boost its free cash flow throughout the second half. Additionally, ConocoPhillips now expects to capture an extra $1 billion in cost and margin enhancements from its Marathon merger by the end of next year. Longer term, ConocoPhillips' long-cycle investments in LNG and Alaska could add up to $6 billion in annual free cash flow by 2029, doubling its expected total from this year.
Well-positioned to withstand lower oil prices
Diamondback Energy has built the largest-scale pure-play producer in the low-cost Permian Basin. The company's growing scale has steadily lowered its breakeven level. Today, Diamondback only needs WTI to average $37 a barrel to produce enough cash to maintain its production rate and dividend level, and 8% improvement from the end of 2023. Meanwhile, the company boasts best-in-class inventory depth, with approximately 9,600 future drilling locations that are economically viable at $50 oil.
The company's low-cost structure enables it to produce lots of cash at the current oil price point. At $60 oil, Diamondback can produce over $5.5 billion in annual free cash flow. This will enable the company to return around $3 billion to investors this year through dividend payments and share repurchases. It will use the remainder to reduce debt. Future debt reduction will strengthen its already rock-solid balance sheet and lower the company's interest expenses, further reducing its breakeven level.
The strength to go on the offensive
EOG Resources' focus is to be among the highest-return and lowest-cost producers in the oil patch. The company has built a diversified portfolio of low-cost resources. Its current capital spending plan can produce $4.3 billion of free cash flow this year at $65 oil.
The company has committed to returning $3.5 billion to investors via its growing regular dividend and share repurchases. EOG is also using its excess free cash flow to enhance its industry-leading balance sheet. That gives it the flexibility to make bolt-on acquisitions during periods of lower oil prices.
EOG Resources did just that earlier this year. It bought Encino in a $5.6 billion deal to enhance its operations in the Utica shale region. The highly accretive acquisition will boost its annualized free cash flow by about 9%. That gave it the confidence to boost its dividend by another 5%.
High-quality oil stocks
ConocoPhillips, Diamondback Energy, and EOG Resources stand out for their fortress balance sheets and low-cost resource bases. Those qualities put these oil companies in strong positions to continue thriving even as oil prices fall. Their strength to handle the industry's storms makes them stand out as some of the top oil stocks to buy, even as crude prices are falling.
