ConocoPhillips (COP +2.86%) and Diamondback Energy (FANG +0.21%) are two of the largest independent exploration & production (E&P) companies (i.e., oil companies without integrated refining assets). Their large-scale operations and high-quality resource positions enable them to generate lots of cash. That gives them the funds to reinvest in expanding their operations and return money to shareholders via dividends and share repurchases.
Here's a look at which is the better oil stock to buy right now.
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ConocoPhillips: The coming cash flow gusher
ConocoPhillips is the largest E&P company, with its production averaging over 2.3 million barrels of oil equivalent per day. It has a strong resource position and global operations. Its diversification sets it apart from many of its E&P peers. In addition to operating in the lower 48 states (unconventional shale), the company has conventional assets, oil sands operations, and liquefied natural gas (LNG) investments worldwide.
The oil and gas giant balances short-cycle investments (it takes 2 to 3 weeks to drill an unconventional shale well that can start producing in a matter of months) with longer-cycle projects. ConocoPhillips is currently investing in four major long-cycle projects (three LNG investments and its Willow oil project in Alaska). The LNG projects will come online over the next three years, while Willow will achieve first oil in 2029. That gives the company tremendous visibility into its growth. ConocoPhillips expects to deliver $1 billion in incremental annual free cash flow each year through 2028 before hitting an $4 billion inflection point in 2029 when Willow is online. That has it on track to nearly double its free cash flow by 2029 (assuming oil averages $70 per barrel) compared to last year's level ($7.3 billion at $69 oil). That growing cash flow should enable ConocoPhillips to deliver top-tier dividend growth.
NYSE: COP
Key Data Points
Diamondback Energy: A pure play on the Permian
Diamondback Energy operates exclusively in the world-class Permian Basin in Texas and New Mexico. It has a large-scale position in that low-cost region, producing around 920,000 BOE/d. That enables it to generate meaningful cash flow (over $6.1 billion in annual free cash flow at $70 oil), which it uses to grow its production and return money to shareholders.
NASDAQ: FANG
Key Data Points
Given the short-cycle nature of wells drilled in the region, the company has the flexibility to ramp capital spending up or down in response to oil prices, which affect its production growth. The company ties its activity levels to the colors of a stoplight based on the market environment. It's currently operating in a "yellow" environment, meaning it's holding its production flat. That's enabling it to generate more free cash flow, which it's using to repay debt, buy back shares, and pay its dividend.
Buy ConocoPhillips for its visible growth
ConocoPhillips and Diamondback Energy have very different strategies. ConocoPhillips' more diversified operations allow it to make longer-term investments that provide greater visibility into its growth. The company expects to nearly double its free cash flow by 2029 by completing its current slate of major capital projects. Diamondback, on the other hand, has limited visibility into growth until higher oil prices give it the green light to resume growth. Given this backdrop, ConocoPhillips looks like the better oil stock to buy right now.
