The Iran Conflict Is Sending Oil Prices Soaring -- These 3 Energy Stocks Are Built to Profit
Key Points
ConocoPhillips only needs oil in the mid-$40s to fund its capital spending plan this year.
EOG Resources can generate a return of more than 100% on new wells drilled at $55 oil.
Diamondback Energy can maintain its current production rate at $30 oil.
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Oil prices have soared this year due to the war with Iran. Brent, the global oil benchmark, has surged from $60 to more than $100 a barrel, an over 70% gain. Crude prices will likely continue to rise the longer the war rages, as it directly impacts the oil market. Iran has blocked a key oil shipping lane and attacked oil infrastructure in the Persian Gulf.
The surge in crude prices will benefit all oil stocks. Here are three energy companies built to profit from higher oil prices.
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ConocoPhillips
ConocoPhillips (NYSE: COP) has built a world-class portfolio of low-cost resources. The oil giant only needs oil to be in the mid-$40s this year to generate enough cash to fund its capital program. Meanwhile, it only needs another $10 a barrel to fund its dividend. Last year, the company generated $7.3 billion of free cash flow when crude prices were in the mid-to-high $60s, covering its $4 billion in dividend payments with plenty to spare.
The oil company expected to generate an additional $1 billion in free cash flow this year due solely to lower capital spending and other costs. With oil prices soaring, it will produce even more excess free cash. ConocoPhillips will likely return that windfall to shareholders by repurchasing additional shares. The company also plans to deliver dividend growth among the top 25% of dividend stocks in the S&P 500.
EOG Resources
EOG Resources (NYSE: EOG) is a leading U.S. oil producer. One thing that sets EOG Resources apart from its peers is its low-cost, high-return operations. The company can drill new wells in the U.S. at an average direct after-tax rate of return exceeding 100% at $55 oil. It has also become increasingly more efficient at producing oil, enabling it to steadily reduce costs. It has reduced its average well costs by 7% over the past year, while delivering a 4% reduction in operating costs.
As a result, EOG Resources can make a lot of money at lower oil prices. For example, the company expected to generate $10 billion in cumulative free cash flow over the next three years at $55 oil. That number would rise to $18 billion if crude averages $70 a barrel, $3 billion more than it made the last three years when oil averaged $73 a barrel. With crude now in the triple digits, EOG can make even more money. That will give EOG more cash to return to shareholders. Since it already has a pristine balance sheet, the oil company can return up to 100% of its free cash flow to shareholders through dividends (regular and special) and share repurchases this year.
Diamondback Energy
Diamondback Energy (NASDAQ: FANG) is a leading oil and gas producer focused on the prolific Permian Basin. It has built one of the largest-scale positions in the region, giving it a competitive advantage. It has one of the lowest breakeven levels in the region, requiring oil to average only $30 a barrel to generate enough cash to drill the wells needed to maintain its current production rate. Meanwhile, it can cover its current dividend at $37 a barrel.
The company's low breakeven level enables it to generate substantial cash even at lower oil prices. For example, it can generate over $3.1 billion in free cash flow at $50 oil and more than $6.7 billion if crude average $80 a barrel this year. The company plans to retain half its free cash flow to strengthen its already solid balance sheet and return the other half to shareholders through dividends (regular and variable) and share repurchases.
Cashing in on higher crude oil prices
ConocoPhillips, EOG Resources, and Diamondback Energy built their businesses to run on sub-$50 oil. As a result, they're cashing in now that crude prices are in the triple digits. Most of these oil companies will likely return this windfall to shareholders through higher dividends and more share repurchases, further enhancing shareholder value.
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Matt DiLallo has positions in ConocoPhillips. The Motley Fool recommends ConocoPhillips and EOG Resources. The Motley Fool has a disclosure policy.
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