Oil prices have stabilized above $50 a barrel, and that changes the equation in this commodity-driven industry. Although it looks like $100 oil is out of the question right now because of expanding U.S. onshore drilling, the current price is high enough for oil companies to make money again. That's exactly what's going on at Royal Dutch Shell plc (RDS.B), which is using the oil upturn to fund its diversification efforts. Devon Energy Corp. (DVN -1.39%), meanwhile, has gotten back on track after a dividend cut. Then there's Suncor Energy Inc. (SU -1.35%), which is set to benefit as new projects come on line at what appears to be just the right time. Here's a deeper dive into each one of these exciting investment opportunities.
It's not just about oil
Jason Hall (Royal Dutch Shell): Shell is one of the biggest oil producers and refiners in the world, and the company has done an incredible job of driving down its costs and improving returns in the oil patch. This has been a key reason that Shell has emerged as the best big oil stock to own. I think the biggest catalyst to its viability over the long term, however, will very likely be natural gas, particularly liquefied natural gas that can be transported worldwide.
Image source: Getty Images.
Shell is also poised to be a big winner from the anticipated growth in global demand for LNG, which the company expects could double by 2035. It already has a major stake in offshore LNG production in Australia, giving it close access to Asia, which has already proven to be a strong market for LNG and will likely be a big source of demand growth going forward. Added together, Shell is positioned very well for what is likely to be a slow-growth environment for oil going forward (before an eventual turn to decline as renewables gain market share).
Now is an excellent time to buy, too. Shares are down almost 12% from early this year, the dividend yield is almost 6% -- while being a safer payout today thanks to a stronger balance sheet and improved cash flows -- and management has the company delivering solid returns. Oil's important, but Shell's future is bigger than oil.
The catalyst investors have been waiting for
Matt DiLallo (Devon Energy): Oil giant Devon Energy has chronically underperformed over the past few years. Among its issues was a bold acquisition made in late 2015 that came at the wrong time. Instead of improving, oil prices kept crashing, putting pressure on Devon's balance sheet. As a result, the company slashed its dividend and sold a boatload of stock to shore up its financial situation in early 2016.
That said, the company has dramatically improved both its cost structure and balance sheet through a series of strategic efforts over the past two years. Consequently, the oil giant is on pace to generate a gusher of free cash flow this year if oil remains in the $60s. Because of that, as well as a recent asset sale, it's in the position to start returning more cash to investors this year, and recently announced plans to boost its dividend by 33% and buy back as much as $1 billion of its stock, which currently represents about 6% of its outstanding shares.
This buyback announcement could prove to be the impetus that gets Devon Energy's stock out of its recent doldrums given what similar strategies have accomplished for its peers.
|
Oil Stock |
Return Since Announcing Buyback |
Peer Group Return Over That Time Frame |
Devon Energy's Return Over That Time Frame |
|---|---|---|---|
|
Anadarko Petroleum |
28.8% |
(0.4%) |
(9.4%) |
|
ConocoPhillips |
20.8% |
(5.4%) |
(28.3%) |
|
Hess |
8.6% |
0.4% |
(16.7%) |
Peer return as measured by the Vanguard Energy ETF.
This history suggests that Devon Energy's stock could deliver similar outperformance in the coming year as long as oil holds up and its operations continue firing on all cylinders, which is what makes it such a compelling oil stock to buy this month.
Dividend growth on tap
Reuben Gregg Brewer (Suncor Energy Inc.): Canadian oil company Suncor managed to get through the deep oil downturn that started in mid-2014 in relative stride. The best proof was that it increased its dividend each year despite weak energy prices, something that many other large oil companies couldn't do. Its streak of annual dividend hikes is up to an impressive 16 consecutive years, and there's likely more to come.
That's because Suncor has big projects that are coming on line that will push the company's production higher by as much as 9% a year through 2020. One example is the Fort Hills oil sands project, which is expected ramp up to full production capacity by the end of 2018.
Fort Hills highlights a key reason to like Suncor today: It's heavy into oil sands. Although perceived as expensive, oil sands are relatively cheap to operate once they are built and have very long reserve lives. To put some numbers on that, Suncor's breakeven point (covering sustaining capital expenditures and dividend payments) is below $50 per barrel of oil and it has an incredible 40-year reserve life.
Suncor is well positioned, with cheap-to-drill assets that have long reserve lives. Image source: Suncor Energy Inc.
While other oil companies are pivoting to U.S. onshore projects that are inexpensive to drill but have short reserve lives and high ongoing costs, Suncor has built a low-cost machine that will support its attractive 3.5% yield and dividend growth plans for years into the future. That's a competitive advantage worth owning today.
Three different stories, all interesting opportunities
Shell is a giant that's pivoting, Devon is an oil company that's getting back on its feet after a rough patch, and Suncor is a slow-and-steady performer with notable production growth in the cards. At least one of these oil stocks should interest you today. That said, the stories behind this trio are unique, so you'll need to do a little homework to find the best fit. The effort, though, will likely be worthwhile.
