Oil companies are crucial to the global economy. They provide fuels for transportation and power. They also supply the core ingredients of petrochemicals used to make products such as plastics, rubber, and fertilizer.
However, the oil industry is highly competitive and volatile. Profits and losses can swing wildly based on small shifts in demand or moves by petrostates such as Saudi Arabia and Russia, whose interests can run counter to those of the public companies in the industry. Supply and demand imbalances can cause huge fluctuations in oil prices. We saw that in early 2022, after Russia's invasion of Ukraine, which sent crude prices soaring into the triple digits for the first time in years.
Additionally, investors must consider the implications of climate change on the long-term prospects of oil and gas. The energy sector is undergoing a massive transition to renewable energy. Even so, there are opportunities in the oil patch. Here's a closer look at some of the top oil stocks and factors to consider before buying.
What are the top oil stocks to buy in 2025?
There are dozens of oil stocks. They run the gamut from pure-play exploration and production companies (E&Ps), midstream businesses, service providers, and refiners to integrated oil majors that do a little bit of everything. Investors have lots of options.
However, some oil stocks stand out as leaders in the sector.
| Name and ticker | Market cap | Dividend yield | Industry |
|---|---|---|---|
| ConocoPhillips (NYSE:COP) | $107.0 billion | 3.64% | Oil, Gas and Consumable Fuels |
| Devon Energy (NYSE:DVN) | $20.6 billion | 2.90% | Oil, Gas and Consumable Fuels |
| Enbridge (NYSE:ENB) | $102.2 billion | 5.70% | Oil, Gas and Consumable Fuels |
| ExxonMobil (NYSE:XOM) | $482.9 billion | 3.46% | Oil, Gas and Consumable Fuels |
| Phillips 66 (NYSE:PSX) | $55.7 billion | 3.40% | Oil, Gas and Consumable Fuels |
Here’s a closer look at these top oil stocks.
1. ConocoPhillips
NYSE: COP
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2. Devon Energy
NYSE: DVN
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Devon Energy (DVN +3.92%) is a U.S.-focused E&P company. It has diversified operations across several low-cost, oil-rich basins. The company's diversification enables it to produce lots of low-cost oil and natural gas, which allows it to generate plenty of cash.
The company launched an industry-first, fixed-plus-variable dividend framework in 2021. It pays out as much as 50% of its excess cash flow each quarter via variable dividend payments after funding its fixed base dividend and capital expenses. Devon uses the rest of its excess cash to strengthen its balance sheet and repurchase shares.
Devon's dividend strategy makes it an enticing option for income-focused investors. They can collect a steady base dividend that's sustainable throughout the oil price cycle and have the potential to earn significant payments during periods of high prices.
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3. Enbridge
NYSE: ENB
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4. ExxonMobil
NYSE: XOM
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NYSE: PSX
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Phillips 66 (PSX -0.18%) is one of the leading oil refining companies, with operations in the U.S. and Europe. It also has investments in midstream operations and in petrochemicals via its CPChem joint venture with Chevron (CVX +1.36%). Its marketing and specialties business distributes refined products and manufactures specialty products such as lubricants.
Thanks to its large-scale, vertically integrated operations, Phillips 66 is among the lowest-cost refiners in the industry. This is the result of its leveraging its integrated midstream network to obtain the lowest-cost crude for refining and petrochemical feedstocks, as well as its investments in projects that give it higher margins on its products.
Phillips 66 also boasts a strong financial profile, which includes an investment-grade balance sheet with very manageable debt. It also has lots of cash on hand. Its low debt and high cash reserves mean it has ample capital to invest in expansion projects, including renewable fuels.
The company has been a dividend growth superstar and a share buyback dynamo over the past decade. The company's focus on making smart investments and returning cash to investors should enable Phillips 66 to continue enhancing shareholder value in the coming years.
Types of oil stocks
There are a number of subsectors inside the oil business.
- Exploration and production (E&P) stocks: These are the companies that find and extract hydrocarbons.
- Oilfield services stocks: These are companies that provide support, equipment, and services to oil and gas exploration and production companies. Services include drilling, seismic testing, well maintenance, and equipment manufacturing.
- Refining stocks: These are companies that process crude oil into usable products like gasoline, diesel, and jet fuel.
- Integrated oil company stocks: These are companies that operate across the entire oil and gas value chain, including exploration, production, transportation, refining, and marketing the finished product.
- Master limited partnership (MLP) stocks: These are publicly traded partnerships that own and operate energy infrastructure assets, such as pipelines, storage facilities, and refineries. A key feature is their pass-through tax status, which avoids corporate-level income tax, though investors are taxed on their share of the income.
How to analyze oil stocks
The oil industry is inherently risky for investors. Although each segment of the industry has a specific set of risk factors, the overall oil business is both cyclical and volatile.
Oil demand generally tracks economic growth. A robust economy can support rising oil prices and oil producer profitability. However, geopolitics and capital allocation also play crucial roles in the industry.
The world's largest oil-exporting nations include members of OPEC (Organization of the Petroleum Exporting Countries), a cartel that works to coordinate members' oil policies. OPEC's actions can significantly affect the price of oil. It can withhold supply to push prices higher or increase its output to drive them lower. OPEC has wielded its power over the years, causing massive fluctuations in oil prices.
Meanwhile, oil companies that operate independently of OPEC can also have an impact on oil prices. If they allocate too much capital to new projects, they can cause an oversupply and weigh on prices. If they hold back too much, they can cause prices to surge. Since oil and gas assets are developed over a long time, companies cannot quickly increase their supplies in response to favorable market conditions.
Given the volatility of oil prices, an oil company must have three crucial characteristics to survive the industry's inevitable downturns:
- A strong financial profile with an investment-grade bond rating, significant amounts of cash on hand or ample access to affordable credit, and manageable, well-structured debt maturities.
- Low costs of operations or relatively stable cash flow streams. E&P companies need to be able to profitably sustain operations at oil prices of less than $40 a barrel, while midstream companies should get more than 85% of their cash flow from steady revenue sources such as fee-based contracts. Downstream companies should have operating costs below the industry average.
- Diversification. Oil companies should operate in more than one geographical region or be at least partially vertically integrated by engaging in several different activities.
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Benefits and risks of investing in oil stocks
No investment is without risk. Investors should understand both the upside and the concerns before jumping into the oil patch.
Energy markets are notoriously cyclical, and oil is extremely sensitive to supply and demand trends. Even a slight imbalance between supply and demand can cause the oil market to go haywire.
- When times are good and the demand for energy is high, prices tend to go up. Investors can also benefit if there are disruptions to supply that cause prices to rise.
- But when demand softens or supply expands, oil prices tend to move dramatically lower. That can lead to periods where younger, less-established companies run into trouble and have to quickly raise capital or face a liquidity crunch.
Because of this dynamic, investors need to be careful when choosing oil stocks. They should focus on companies that can survive rough patches since they'll be better positioned to thrive when markets turn healthy again.
How to invest in oil stocks
- Open your brokerage app: Log in to your brokerage account where you handle your investments.
- Search for the stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
Common mistakes to avoid when investing in oil stocks
Oil is a cyclical commodity. Many of these companies look like great investments when oil prices are high, but less so when prices fall. One common mistake investors can make is ignoring oil price trends and getting an unpleasant decline as a result.
Other common mistakes to avoid:
- Inadequate diversification: Never put too much of your nest egg into one company or one type of company, especially if it is in a cyclical sector.
- Chasing yields: Some stocks look like they pay eye-watering dividends. Before buying in, you should make sure that the dividend is sustainable.
- Timing the market: Although oil prices do ebb and flow, strong companies can outperform over time. Trying to guess the future price of oil, and jumping in and out of a stock based on those predictions, will likely lead to underperformance compared to just sticking to long-term investments in quality companies.
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