Oil prices have been scorching hot this year. Crude prices are up roughly 30% on the year, thanks in large part to OPEC’s support. The oil producing group recently agreed to continue lending a helping hand by holding back additional supply for another month.
That’s giving oil stocks the fuel to rally as they’re cashing in on higher crude prices. With that market backdrop in mind, we asked our contributors which ones are best positioned to capture this upside. They like what they see in ConocoPhillips (NYSE:COP), Royal Dutch Shell (NYSE:RDS.B), and Devon Energy (NYSE:DVN).
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Not as fast as expected
Reuben Gregg Brewer (Royal Dutch Shell): Royal Dutch Shell cut its dividend in 2020 and said it was moving down the path toward a cleaner future. Although that statement fits nicely with the current zeitgeist, the integrated oil giant isn’t actually shifting gears as fast as you might think. For example, over the near term, the energy company only intends to put 10% to 15% of its capital spending directly into its renewable power business.
Shell is actually getting some pushback from the carbon reduction crowd, including within the company’s own ranks, that it isn’t moving fast enough. But, with oil prices on the rise, that’s actually a good thing for investors who believe a more moderate pace is the way to go. Simply put, Royal Dutch shell will continue to benefit from its energy business for longer.
Shell’s capital spending plans:
| Category | Capital Expenditure |
|---|---|
| Marketing | $3 billion |
| Integrated Gas | $4 billion |
| Chemicals and Products | $3 billion to $4 billion |
| Upstream | $8 billion |
| Renewables and Energy Solutions | $2 billion to $3 billion |
| Total | $19 billion to $22 billion |
Data source: Royal Dutch Shell.
That, in turn, will make it easier for Shell to live up to some of its shareholder promises. For example, higher oil prices will make it easier to pay down debt. This includes using cash generated by the business and potentially higher valuations when it goes to sell oil-related assets. In addition, the company’s 4% annual dividend growth pledge will be much easier to achieve if its oil business is thriving, with extra cash going toward buying back shares. All in, if oil prices stay high, the company and its shareholders benefit. And, at the same time, the cost of a slow and steady transition to clean energy will be that much easier to bear, too.
A well-timed deal to cash in on higher oil prices
Neha Chamaria (ConocoPhillips): I believe ConocoPhillips is a top stock to play the oil market rebound for two key reasons: solid cash-flow growth potential and value addition from a recent acquisition.
ConocoPhillips lost $2.7 billion in 2020, which isn’t surprising given how the steep drop in oil prices drove the company’s realized price down nearly 34% year over year. Yet ConocoPhillips generated $5.2 billion in cash from operations during the year,…
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