If Iran Closes the Strait of Hormuz, These 3 U.S. Oil Stocks Could Soar

While it appears as though a temporary ceasefire may be on the horizon, the war between Israel and Iran is likely to linger into the future, with the U.S. now involved to a degree after last weekend's bombings of Iran's nuclear facilities.

If things were to re-escalate, the Iranian regime could take a worst-case, most damaging counter-measure by blockading the Strait of Hormuz, the narrow waterway between Iran and Oman through which 21% of the world's oil consumption flows.

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If that were to happen, oil prices would spike in the short term and stocks would probably move lower. However, the following U.S.-focused oil and gas giants would each benefit, with one being a Warren Buffett favorite.

Image source: Getty Images.

ConocoPhillips

ConocoPhillips (NYSE: COP) is one of the largest U.S.-based oil and gas giants, which also has a very high concentration of its exploration and production in the United States. Although ConocoPhillips is diversified geographically, about 75% of its operating earnings come from the contiguous U.S., Canada, and Alaska. The next largest segment is in the Pacific, across China, Malaysia, and Australia.

A remaining 12.5% or so of its earnings comes from Europe, Middle East, and North Africa. While ConocoPhillips does have some production in Qatar, which would be affected by the closing of the Strait of Hormuz, that production is just a portion of this segment, and thus a small fraction of Conoco's overall production.

Conoco currently trades fairly cheaply, at just 11.6 times earnings with a 3.4% dividend yield, reflecting a low-growth outlook. However, if oil prices were to spike, management says that for every $1 increase in the price of Brent crude oil, Conoco would increase its operating cash flow by $65 million to $75 million. For every $1 increase in West Texas Intermediate, Conoco would see an additional $140 million to $150 million.

Conoco gives investors the strength of a very large-cap oil company with an excellent balance sheet and relatively low debt for its size, at less than equal to EBITDA. So it's a risk-off play for those who nevertheless would like concentrated exposure outside the Middle East.

EOG Resources

EOG Resources (NYSE: EOG) is present in most of the major shale plays in the United States, along with exploration properties in Trinidad and Tobago. As a 100% U.S.-based producer, EOG's cargos obviously don't flow anywhere near the Strait of Hormuz.

EOG has also been an excellent operator, having steadily ramped its cash flow, and along with it, total shareholder returns. Between 2021 and 2024, EOG has more than doubled its dividend, which now yields 3.3%, while also adding share repurchases. In that same time span, EOG has increased its total shareholder payouts, dividends and repurchases included, from 48% of free cash flow to 98%.

EOG has also been able to garner higher-than-average oil and gas price realizations than its peers, thanks to its well positioning near low-cost pipelines and storage operators, which enables EOG to realize more of its oil and gas sales than others. That means if the price of oil spikes on a Middle East geopolitical conflict, EOG Resources could disproportionately outperform.

EOG has been able to return so much cash to shareholders because of its excellent balance sheet, which is actually unlevered, with more cash than debt. As such, it's another low-risk way to play U.S. shale.

Occidental Petroleum

A third great option for U.S.-focused investors is Warren Buffett holding Occidental Petroleum (NYSE: OXY). Although Occidental does have some of its production in the Middle East, specifically Oman, which would be affected by any closure of the Strait of Hormuz, about 84% of its production comes from the U.S., with over half of its total production concentrated in the oil-gushing, low-cost Permian Basin in West Texas, where Occidental has 2.9 million acres of land.

Occidental's onshore inventory is also very deep, with 13 years of production at the today's rates at breakeven prices below $60 per barrel, with 10 years of inventory with breakeven costs under $50, and a good portion of those wells having breakeven costs below $40.

Meanwhile, Occidental has a history of lowering costs over time, opening up more of its inventory. On the recent earnings release, Occidental management noted that it had reduced well costs by 12% across its U.S. fracking portfolio since 2023.

As the company with some of the deepest inventory in the Permian Basin, Occidental is very well positioned for the long term, which is probably why Buffett is such a fan. And of course, if non-U.S. supply was cut off for any reason, because of the closing of the Strait of Hormuz or some other geopolitical event, Occidental would be a prime beneficiary.

That being said, Occidental also has a higher debt load than the other companies mentioned, especially after its $12 billion acquisition of CrownRock last year. So that's something for investors to monitor. However, should the price of oil spike, Occidental may have more upside as a leveraged play on U.S. oil and gas.

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Billy Duberstein and/or his clients have positions in ConocoPhillips. The Motley Fool has positions in and recommends EOG Resources. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.