Upstream firms discover and create energy, and midstream pipeline companies transport and store energy. Downstream companies refine oil and gas into finished goods that make up the oil and gas sector. Oilfield drilling equipment and services are also available from corporations, and some also produce and maintain manufacturing equipment. Royal Dutch Shell PLC, BP PLC, and Exxon Mobil Corp., all located in the Netherlands, are among the industry's top players.
In late February, the Russian invasion of Ukraine interrupted the oil supply, causing oil prices to skyrocket. To lower fuel costs, President Biden authorized the most significant release of emergency oil reserves from the United States ever on March 31. Starting in May, the US will release 1 million barrels per day (B/D) of crude oil from the Strategic Petroleum Reserve for the next six months.
Tapping the reserve will only bring temporary respite from increasing oil prices and a supply shortage.
How do you evaluate oil stocks?
For investors, the oil sector is inherently hazardous. Although each section of the industry has its own set of risks, the oil industry is cyclical and volatile.
Oil demand is usually correlated with economic development, and a strong economy may support rising oil prices and oil producer profitability. On the other hand, geopolitics and capital allocation are essential factors in the sector.
OPEC's members (Organization of Petroleum Exporting Countries), a cartel whose members attempt to coordinate their oil policies, comprising the world's largest oil exporters.
The activities of OPEC may substantially impact the price of oil, and it may either limit supply to raise prices or boost production to decrease them. Over the years, OPEC has used its authority to cause significant changes in oil prices.
Oil corporations who are not part of OPEC, on the other hand, may affect oil prices. If they invest too much money in new projects, they risk creating an oversupply and downward pricing pressure.
Meanwhile, if they hold back too much, prices may rise. Companies cannot swiftly boost their supply in response to favorable market circumstances since oil and gas assets are produced over a lengthy period.
Given the ebb and flow of oil prices, an oil firm must possess three critical features in order to weather the inevitable downturns in the industry:
A robust financial profile, including an investment-grade bond rating, considerable cash on hand or easy access to credit, and debt maturities that are manageable and well-structured.
Low operating expenses or cash flow sources that are reasonably steady. Midstream firms should derive more than 85% of their cash flow from stable income streams such as fee-based contracts, while E&P companies should be able to successfully maintain operations at oil prices of less than $40 a barrel. Operating expenses for downstream enterprises should be lower than the industry average.
Diversification. Oil firms should operate in many geographic regions or be vertically integrated by working in various activities.
ConocoPhillips
ConocoPhillips is one of the world's major oil and gas exploration and production businesses. It operates in over a dozen countries and specializes in the discovery and production of oil and natural gas.
ConocoPhillips benefits from its size and access to some of the world's cheapest oil, including a significant presence in the Permian Basin. In 2021, it strengthened its position in that low-cost, oil-rich region by purchasing Concho Resources and Shell's holdings there.
It can earn money in practically any oil market condition, with average expenses of about $40 per barrel and many of its resources significantly lower, allowing the firm to create a lot of cash flow.
ConocoPhillips intends to return a considerable amount of its free cash flow to investors in the coming years, given the uncertainties surrounding future oil demand. It wants to pay a rising dividend, repurchase stock, and provide a variable cash return depending on its surplus cash.
Finally, the company's low-cost portfolio is complemented by a top-tier financial sheet. Due to its low leverage ratio and large cash reserves, ConocoPhillips consistently has one of the most substantial credit ratings among E&P businesses. Because of these features, it is one of the most secure E&P investments.
Devon Energy
Devon Energy is an exploration and production firm based in the United States, and its activities are spread over several low-cost, oil-rich basins. Because of its diversity, the corporation can produce a lot of low-cost oil and natural gas, allowing it to create a lot of cash.
In 2021, the business introduced an industry-first fixed-plus-variable dividend structure. After paying its set base dividend and capital costs, it distributes 50% of its surplus cash flow through variable dividend payments each quarter. Devon invests the remainder of its cash in improving its balance sheet and repurchasing shares.
Devon's dividend approach makes it a compelling choice for income investors. They'll get a consistent base income that will last throughout the oil price cycle and the chance to earn big payouts at high prices.
Enbridge
Enbridge manages one of the world's largest oil pipeline networks, and it carries 30 percent of North America's oil production. Enbridge also has an extensive natural gas pipeline infrastructure and a natural gas utility and renewable energy business.
Long-term contracts and government-regulated prices support Enbridge's pipeline operations, creating consistent financial flow. This allows it to pay a high-yield dividend while still investing in its energy infrastructure business.
Enbridge has made significant expenditures in infrastructure targeted toward greener energy in recent years. Natural gas pipelines, offshore wind energy in Europe, and hydrogen energy are examples of this. These investments position Enbridge for the future of energy while also ensuring that it can meet the current requirements of the oil market.
ExxonMobil
ExxonMobil is a fully integrated supermajor and one of the world's biggest oil firms. It is involved in every aspect of the oil and gas sector, including exploration and production, midstream, petrochemical manufacture, refining, and even selling refined and petroleum products to clients.
ExxonMobil has recently concentrated its efforts on lowering corporate expenses and increasing efficiency. In 2022, these investments will start to pay off. By focusing on its highest-return assets and working to better harness its huge size, the firm has significantly lowered its oil production costs over the previous few years. When oil prices are substantially higher, it can create a lot of cash flow.
This cash flow should protect ExxonMobil's dividend and reputation as a Dividend Aristocrat. Many investors are avoiding oil companies outright due to the expansion of renewables. On the other hand, ExxonMobil is investing in lower-carbon fuel sources like carbon capture and storage and biofuels.
This should allow it to continue delivering fuel to the economy for many years to come.
Phillips 66
Phillips 66 is a major oil refining company with facilities in the United States and Europe. Through its CPChem joint venture with Chevron, it also has stakes in midstream operations and petrochemicals (NYSE: CVX). Finally, the marketing and specialities segment of the corporation sells refined commodities and creates specialized products such as lubricants.
Because of its large-scale, vertically integrated operations, Phillips 66 is one of the industry's lowest-cost refiners. This is due to the company's use of its integrated midstream network to source the lowest-cost crude for refining and petrochemical feedstocks and investments in projects that increase product margins.
Phillips 66 also has a robust financial profile, with an investment-grade balance sheet and low debt levels. It also has a sizable cash reserve. Thanks to its low debt and significant cash reserves, it has adequate funds to engage in growth initiatives, including renewable energy.
Over the last decade, it's been a dividend growth and shares repurchase powerhouse. Phillips 66 should be able to continue increasing shareholder value in the following years as a result of its emphasis on making sensible investments and returning cash to investors.
Surge Energy Inc
Sun Energy is primarily focused on oil and gas exploration, development, and production in Western Canada, particularly in Alberta and Manitoba. The firm is headquartered in Canada. Surge Energy concluded a $130 million five-year term loan financing in fiscal 2021 to replace some of its six-month revolving bank credit with more stable long-term debt capital. Surge Energy's dependence on more volatile, short-term debt will be significantly reduced due to the financing. Surge Energy Inc. is also listed on the Toronto Stock Exchange under SURGE (SGY.TO).
Frontera Energy Corp
Frontera Energy is a Canadian firm that specializes in oil and natural gas exploration, development, production, transportation, storage, and sale in South America. Its holdings in 34 exploration and production blocks in Colombia, Ecuador, and Guyana make up its asset portfolio.
Baytex Energy Corp
Baytex Energy is a Canadian exploration and production firm for oil and gas. It deals in acquiring, developing, and producing crude oil and natural gas. The Eagle Ford in Texas and the Western Canadian Sedimentary Basin are two of its most crucial oil resource plays.
Baytex stated on April 1 that its revolving credit facilities had been extended for another two years, until April 2026. As part of the extension, its credit was increased to $850 million. Baytex Energy Corp. is also listed on the Toronto Stock Exchange under the symbol BTE (BTE.TO).
Range Resources Corp
Range Resources is a natural gas and natural gas liquids exploration, development, and acquisition company. Its activities are mostly concentrated in the Southwest, the Appalachian Basin, and the Gulf Coast. The firm stated on Feb. 22 that it would resume paying a regular cash dividend of $0.32 per share, or $0.08 every quarter. In the second part of 2022, the payments will commence. 6
EQT Corporation
ETQ is an independent natural gas production firm with activities in the Appalachian basin's Marcellus and Utica shales. Based on average daily sales volume, it is one of the country's major gas producers. The volume increases from purchased properties contributed to a net sales volume of 1,858 billion cubic feet equivalent.
Advantage Energy Ltd
Advantage Energy is a natural gas and liquids exploration and production firm established in Canada. On February 24, Advantage Energy Ltd. released its fourth-quarter and full-year 2021 results, which concluded on December 31, 2021. In the fourth quarter, net income increased by more than 14 times over the previous year, and the firm ended the year with a profit, compared to a loss in 2021.
The results were aided by a 10% increase in yearly output of barrels of oil equivalent per day over the previous year.
Vertex Energy Inc
Vertex Energy is a company that specializes in the production and distribution of traditional and alternative fuels. It's mostly a refinery that recycles old oil, motor oils, and other petroleum waste.
Vertex finalized the purchase of a 91,000 barrel-per-day Mobile, Alabama refinery and associated logistical assets from Royal Dutch Shell Plc's US businesses on April 1. Vertex also received roughly $165 million in hydrocarbon inventory as part of the deal. 9
Obsidian Energy Ltd
Obsidian Energy is a petroleum exploration and production firm based in Canada. It explores, develops, and owns oil and natural gas resources in the Western Canada Sedimentary Basin, as well as associated production infrastructure. (OBE.TO). 10
The BP Prudhoe Bay Royalty Trust handles royalties from the Prudhoe Bay oil field.
BPT has royalties interests in oil and gas sites in the United States. It gets a royalty per barrel on oil produced by British Petroleum's operating interests in the Prudhoe Bay Field on Alaska's North Slope.
Break-Even Price and Operating Costs
Oil exploration, production, and transportation companies are notorious for having high operating expenses. As a result, this will have a significant impact on how much profit the oil stock may earn.
In this business, operational expenses are often determined on a per-barrel basis.
ExxonMobil, for example, has a break-even value of $41 per barrel, according to recent reports.
This indicates that if oil prices rise beyond $100 per barrel, as they are now, ExxonMobil will be able to produce substantially higher profit margins.
Companies with high operational expenses would likely suffer the most if and when oil prices fall again – which they will if and when OPEC decides to boost output levels.
The Key to Investing In The Oil Industry is Risk Management
The oil market is very volatile, and even a little mismatch in supply and demand may send it into a tailspin. That was seen in early 2020, when the COVID-19 outbreak threw the industry into disarray.
The contrary is also true: oil prices may spike when demand increases during a supply shortage. That was the situation in early 2022 when oil prices soared as the economy recovered from the epidemic and supplies were squeezed as a result of Russia's invasion of Ukraine.
As a result of this dynamic, investors must exercise caution when selecting oil equities. They should concentrate on firms that can weather market storms since they will be better positioned to succeed when markets recover.
Program of Dividends
Some of the top dividend payers in the stock market are oil firms. All of the firms on our list of the finest oil stocks, with the exception of Antero Resources, have a good dividend policy in place.
As a result, in addition to financial gains, investing in oil firms may provide a steady income stream.
China Petroleum, for example, now has a rolling dividend yield of approximately 6.6 percent.
Renewable Energy Diversification
When looking for the top oil stocks for your portfolio, another measure to consider is whether or not the company is seeking to diversify into renewable energy.
After all, several countries throughout the globe have pledged to prohibit traditional gasoline and diesel vehicles by 2030. As a result, existing oil corporations will need to move quickly to gain a competitive advantage in the renewables market.
Since COVID, There Has Been a Recovery
It's also a good idea to consider how your chosen oil stock has fared during the outbreak, when practically every firm in the sector suffered a large loss.
Many of the finest oil stocks we looked at on this page have recovered their COVID-related share price losses and have also attained new heights since then.
However, other companies, including as BP, are still trading at a discount to pre-pandemic values.
Is Investing in Oil Stocks a Good Idea?
If you're trying to purchase the finest oil stocks just because of how rapidly the price of this commodity has risen in the last year, you should take a step back and do some extra research.
After all, oil is a very volatile asset class that has moved in a predictable range over several decades.
Furthermore, as previously said, there is often a significant difference between oil prices and enterprises working in this field.
To guarantee that you buy in oil stocks with your eyes wide open, we've outlined some of the most important factors to consider - both positive and negative – before moving further.
Conclusion
Global commodity prices are surging, so now might be an excellent moment to diversify your portfolio with some of the top oil stocks. Not only are oil stocks doing well, but firms in this industry also have a strong dividend program.
You can register an account with eToro and deposit cash fee-free in less than five minutes to purchase oil stocks right now at 0% commission and with a minimum investment of only $10 per transaction.
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