The price of crude oil has bounced around quite a bit this year. The U.S. oil benchmark, West Texas Intermediate, is currently right around $58 per barrel. While that’s well below its high of more than $65 a barrel, it’s still up more than 27% for the year.
Despite the overall improvement in the price of oil, most energy stocks have lost value this year, given that the SPDR S&P Oil & Gas Exploration & Production ETF is down about 20% year to date.
That slump in oil stocks doesn’t make much sense, especially when several producers can thrive at the current oil price. Three that are doing just that are…
A $50 billion gusher lies ahead
ConocoPhillips has been putting up excellent numbers all year. Through the third quarter, the U.S. oil giant has produced $4 billion of free cash flow, with oil prices in the U.S. that have averaged about $57 per barrel this year. The company has returned nearly all that money to investors through its dividend and share repurchase plan. However, despite that strong financial performance, its shares have fallen by about 3% this year.
Because of that underperformance, ConocoPhillips’ stock looks like an excellent buy, given what it sees ahead. The company recently unveiled its 10-year plan, which would see it generate a jaw-dropping $50 billion free cash flow, assuming oil averages $50 a barrel. That will give it the money to continue paying a growing dividend as well as buy back another $30 billion in stock. For perspective, that’s enough money to retire nearly half its outstanding shares at the current price. The company’s ability to generate a gusher of free cash flow at lower oil prices should enable it to produce strong total returns in the coming years.
A bold transformation
Earlier this year, Devon Energy laid out a bold transformation plan to focus all its attention on its four oil-rich U.S. shale assets. That strategy is clearly delivering results. One of the highlights is that the company is on track to generate more than $3 billion in excess cash this year thanks to a combination of free cash flow and asset sales. It has used those funds to pay off debt and repurchase stock. As a result, it now has one of the lowest leverage ratios in the oil patch. It’s also on track to reduce its outstanding share count by 30% from its peak level in 2017. Despite all that success, its stock is only up about 1% on the year.
Devon’s new strategy has it well positioned to prosper in the coming years. In 2020, it can generate enough cash at $48 oil to pay its dividend as well as drill the new wells needed to grow its oil production by 7% to 9%. Because of that low oil price breakeven level, the company can generate a gusher of free cash flow at higher prices. For example, if crude averages around $55 a barrel next year, Devon could produce $400 million in free cash. That’s enough to repurchase another 4.5% of its outstanding stock at the current price.
Never been better
EOG Resources has also delivered excellent operational and financial results this year. During the third quarter, for example, its oil production was up 12% year over year, coming in above the high end of its target range. Meanwhile, the company produced $2 billion in cash. That was enough money to cover its rapidly growing dividend as well as its capital expenses with more than $300 million to spare, bringing its year-to-date free cash flow total to $774 million.
CEO Bill Thomas commented on the company’s performance:
EOG’s operating performance has never been better. The company generated outstanding financial results in the third quarter driven by improvements in every area. We reduced operating expenses, grew volumes at double‐digit rates while lowering well costs and generated substantial free cash flow. EOG has never been in a better position to sustain this success long into the future.
That’s evident by its initial outlook for 2020. The company expects to…
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