Oil has rapidly turned into a front-page concern for the global economy. The price of oil trended downward for years after the Russia/Ukraine spike, but has since rocketed to around $100 a barrel or higher due to the current conflict in Iran and the closure of the Strait of Hormuz.
While it is unclear what the next months will hold regarding the flow of oil coming from the Middle East, it is clear that if the strait is closed for longer, the price of oil could spike to new heights due to the restriction of a large amount of supply (or destruction of infrastructure from bombings).
This could have a detrimental impact on the global economy, hurting the stock market. However, a few energy stocks will benefit. If oil hits $150 a barrel, here are two energy stocks you are going to want to buy to hedge your portfolio.
NASDAQ: FANG
Key Data Points
ConocoPhillips and its upstream focus
When evaluating energy stocks poised to benefit from rising oil and natural gas prices, it is important to distinguish upstream from downstream players in the petroleum industry. Upstream players are those who explore for and extract oil and gas from the ground, while downstream players refine products. If the price of oil or natural gas rises, upstream producers can earn fat margins as they sell their product down the supply chain.
ConocoPhillips (COP 1.66%) is one of the largest upstream energy players in the world, and even though it has some exposure to natural gas in Qatar, the company should benefit tremendously if oil prices reach $150. Last year, it generated 2.375 million barrels of oil (or natural gas equivalents), with around 1.5 million barrels from the lower 48 states.
The last time oil prices spiked, so did ConocoPhillips' cash flow. Free cash flow peaked at over $16 billion in 2022. If oil prices reach $150, we could see free cash flow of over $20 billion. Management is guiding to return 45% of excess cash flow to shareholders in 2026, which would likely result in significant dividends and share buybacks. ConocoPhillips stock is likely to do well if oil prices zoom to $150 at some point this year.
Image source: Getty Images.
A company centered on North America
Another factor creating uncertainty is the closure of the Strait of Hormuz. If conflicts continue in the Middle East, companies with assets in North America will do much better, as they have a much safer, more reliable supply to bring to market.
One pure play on North American oil and gas is Diamondback Energy (FANG +0.35%). It is a smaller player that focuses on Texas and should benefit tremendously if the price of oil goes to $150 (along with natural gas).
The stock is up 30% year to date, but I still think it has plenty of upside for shareholders if the Middle East remains under fire and the Strait of Hormuz remains closed. The company generated $5.5 billion in free cash flow last year, even with oil prices in the gutter. Oil prices around $150 a barrel would likely lead to much higher levels of cash flow. Like ConocoPhillips, Diamondback Energy is aggressively returning cash to shareholders through buybacks, and it will be able to do so even more this year.
With a market capitalization of $55 billion right now, Diamondback Energy looks like a great stock to buy if you are worried about oil hitting $150 a barrel.
COP Free Cash Flow data by YCharts
Is oil going to $150 a barrel?
Oil has never gone to $150 a barrel. The record is slightly below this, at $147 in 2008 when the U.S. economy was in a recession. Some economists argue that the high price of oil was one of the key factors that made the economic downturn almost two decades ago even worse.
Breaking this previous record would not be out of the question if the Strait of Hormuz closes or if many of the current Middle Eastern supply sources go offline for an extended period. This is especially true given all the inflation over the past two decades.
Don't assume it is 100% certain that oil prices will reach $150 in 2026. Anything can happen in geopolitics. But if you are truly worried about a supply shock, adding both ConocoPhillips and Diamondback Energy could be a great way to hedge your portfolio.
