Oil. Black gold. Texas tea. However you refer to it, it’s still a product in hot demand, even in a world seeing lower and lower costs for alternative energy.
While the oil sector can be cyclical, it’s also tied to the economy. So it’s no surprise that oil has had a tough year, with Brent crude prices going from $60 at the start of 2020 to negative $40 as traders needed to get out of futures contracts, to a pop back to $40.
That’s an overall move off the lows of $80 per barrel, and chances are with a gradual economic recovery, oil and gasoline demand will remain robust and higher crude oil prices will prevail.
With these factors in mind, a number of top oil stocks offer safety, dividend yields, and assets that will make their valuation explode higher if oil prices do as well. That’s what makes what follows the 5 best oil stocks to buy now.
Best Oil Stock #1: ExxonMobil (XOM)
At one point, ExxonMobil was America’s largest stock by market cap. However, technology companies have long since surged ahead to take the top spots for total size.
Exxon produces crude oil and natural gas around the world, including the manufacture and transport of various oil-based products as well. It also makes specialty chemicals such as isopropyl alcohol, and is also a refiner.
The past year’s volatility in the energy sector hasn’t been kind to oil or gas. Shares are off over 37 percent in the past year, even as revenue has declined by a mere 10 percent. But that’s helped push the dividend up to mouth-watering levels.
At present, shares yield 7.4 percent, with a $3.48 annual payout. That’s a bit lower than what the company has paid in previous years. The cut dividend payment, as well as the reduced share price, still present a high-yield opportunity today.
The oil producer is currently paying out more in dividends than from its cash flow at the moment. That’s generally a concern, as a payout ratio over 100 percent isn’t sustainable. But with higher—and steadier—oil prices likely down the line, the company should be fine. It’s had to deal with this kind of uncertainty in the commodity space before.
In its long operating history, it’s already seen every market under the sun for oil, and will no doubt pull through this time as well, thanks in part to its strong balance sheet relative to competitors. That makes this high-yielder look like an attractive buy today ahead of an earnings recovery.
Best Oil Stock #2: Enbridge (ENB)
An energy infrastructure company, Enbridge focuses on the transportation of oil and natural gas, via pipelines. The company also transmits and processes gas, and provides other logistical services in the sale and transport of these fossil fuels. The company operates throughout Canada and the United States.
Because most of the company’s operations focus on transport, there’s a lot less volatility in the company’s performance and shares. The company saw only a 6 percent drop in share price in the past year, and the company earned a profit even as earnings growth dipped a bit. It wasn’t a huge profit, with only a 5 percent margin, but a company that can hold up this well when the rest of its industry drops is certainly worth a closer look.
Meanwhile, thanks to the company’s pipeline plays and consistent revenues there, Enbridge pays out a solid dividend. The company recently upped its dividend from $1.97 per share to $2.41, pushing the already-generous dividend yield from 6.3 percent to 7.7 percent. For investors looking for income in the oil space, this is one attractive play.
Best Oil Stock #3: ConocoPhillips (COP)
One of the biggest oil companies in the industry, ConocoPhillips explores, produces, transports and markets crude oil, natural gas, and other related fossil fuels. The company has conventional oil reservoirs, shale, heavy oil and oil sand operations across four continents.
The volatility of the oil market in the past year, to say nothing of the ongoing drop in natural gas, has been tough for shares, which are off 30 percent. Revenue has likewise dropped a similar amount. But the company is still profitable, sporting a profit margin of 12 percent.
Why recommend big oil company stocks now? Thanks to the selloff in shares, there’s a nice value here. And the company’s history of regular dividend increases has pushed the dividend yield on shares to just over 4 percent. That makes it one of the better players among oil stocks.
Finally, ConocoPhillips is a cash cow with a strong balance sheet containing just $7 billion in net debt. That’s a strong position for whatever uncertainty lies for the sector ahead.
Best Oil Stock #4: Petroleo Brasileiro (PBR)
The national oil company of Brazil, it’s better known as Petrobras for short. A producer and seller of both oil and gas, this player is best known for having some of the world’s largest reserves outside of the Middle East and the Permian Basin.
The catch? Much of it is held offshore. At current prices, the cost to extract that oil doesn’t make for a profitable venture. But as oil prices rise, Petrobras can start oil production in these unused resources in earnest, becoming one of the biggest players outside of OPEC and the United States if prices really take off. That makes it less of a gas play compared to other major oil companies as well.
The company saw a modest loss last year, with profit margins of negative 4 percent. While not a huge loss, the rapid moves up and down in the oil space, including spot prices trading negative at one point, has led to a 40 percent drop in Petrobras shares in the past year.
At current prices, shares have a dividend yield of 3.9 percent. It’s not the biggest in the space, and it can be variable. But with shares under $10, it’s an inexpensive way for investors to get into the oil space, diversify internationally, and play other trends as well such as a weaker U.S. dollar. The company’s massive offshore assets are the real winner in an oil price surge, which should see earnings soar in time.
Best Oil Stock #5: EOG Resources (EOG)
One of the larger producers that also has an exploration bent, EOG Resources is an energy company that produces crude oil and natural gas in the United States, with sizeable operations in Trinidad, Tobago, Canada and China.
EOG Resources is notable in the space for its robust free cash flow, as well as its ability to produce some of the lowest-cost shale oil in the industry. This is one company that’s likely to survive a prolonged period of low oil prices, while possibly picking up top assets from more leveraged players that went broke. Its natural gas exposure isn’t too bad for that part of the market to weigh on it.
Thanks to its exposure to the shale space, the stock price has dropped a whopping 42 percent over the past year. But revenues are down only 14 percent, and EOG Resources still has a 13 percent profit margin, a reasonably high one for the commodity space.
Investors are getting a near-three percent dividend yield right now, and the company just bumped up its annual dividend by 26 cents over the past year.
FAQ’s
Should I Buy Oil Stocks?
Oil stocks make sense as part of any well-rounded, diversified portfolio. While the oil industry isn’t the hot play Wall Street traders on the stock market are attracted to nowadays, there are plenty of trading opportunities in the oil market with companies large and small.
Investors looking at the space for the first time should look at some of the larger players first, if not one of the many oil ETFs of mutual funds, then drill down (so to speak) into less-well-known energy stocks that may be on the cusp of a large discovery or explosive growth.
Will Oil Stocks Rebound?
The crude oil stocks have already started to rebound from the massive gyrations in the price earlier this year. It’s likely that oil prices will continue to head higher in time as the economy recovers as well. Even with the rise of so many forms of alternative energy, this is a massive sector with substantial demand behind it, and new supplies being found are far less plentiful than the large finds of yesteryear. It may take time, but prices will likely rebound even further.
What is the Best Oil Stock to Buy Right Now?
Among the U.S.-based oil majors, ExxonMobil is the best play here. It’s got a solid valuation, strong balance sheet, and sizeable dividend at today’s prices. Among pipeline players, Enbridge looks attractive here with a particularly high yield, although shares may be less volatile as oil rises. The oil market has a number of smaller plays as well for those willing to take on a bigger risk with their trading.