Oil prices have slumped in recent months. West Texas Intermediate, the primary U.S. oil price benchmark, was recently around $70 a barrel. That's well below its peak of over $85 a barrel a few months ago because of healthy supplies amid demand concerns from a potential slowdown in the global economy.
While falling oil prices will affect oil company profits, several producers are well equipped to handle lower prices. Chevron(NYSE: CVX) and Devon Energy(NYSE: DVN) stand out for their ability to thrive at lower oil prices. That makes them great oil stocks to buy in the current environment.
Built to run on lower oil prices
Chevron has built an advantaged global resources portfolio. That enables it to earn high profit margin and returns on its investments, meaning it can still thrive at lower oil prices.
The integrated global energy giant has stress-tested its portfolio for much lower oil prices. A downside scenario assumes a flat $50 oil price from 2025 through 2027. Under that bear case, Chevron would produce enough cash flow from operations to cover its growing dividend and planned capital spending to grow its production at a 3% annual rate. Meanwhile, it can use its strong cash-rich balance sheet to repurchase shares at the low end of its $10 billion-$20 billion annual target range. That's enough to retire about 3% of its outstanding shareseach year.
Meanwhile, the company's upside scenario assumes a flat $70 oil price in the 2025 to 2027 timeframe. Under that environment, Chevron could repurchase shares at the upper end of its target range, enough to retire 6% of its outstanding shares each year. That price point would also be enough to grow its free cash flow by more than 10% annually.
Chevron is working to further enhance its ability to thrive at lower oil prices by acquiring Hess. While a dispute with ExxonMobil has delayed that deal, it would significantly bolster and extend Chevron's production and free cash flow growth profile. At $70 oil, adding Hess would help more than double Chevron's free cash flow by 2027.
With its stock down double digits over the past year because of lower oil prices and the delayed Hess deal, Chevron looks like a bargain. It's especially attractive for income-seeking investors, given its nearly 4.5% dividend yield.
Dirt cheap, and doing something about it
Devon Energy has built a premiere multibasin U.S. oil and gas business. Its growing scale has reduced its costs and enhanced its profitability. The company's current breakeven funding level is $40 a barrel.
That means Devon can generate significant free cash flow at $70 a barrel. Its free cash flow yield at that price point is around 9%. That's more than double the free cash flow yield of the S&P 500 and triple that of the Nasdaq, implying that shares of Devon are dirt cheap.
Devon is working to enhance its scale and profitability by acquiring Grayson Mill Energy to bolster its position in the Williston Basin. The acquisition adds high-margin production, enhanced by its midstream infrastructure in the region. The highly accretive acquisition will further increase Devon's free cash flow, even at lower oil prices.
Despite its ability to print cash at $70 oil, shares of Devon have slumped nearly 25% from their peak earlier this year. That's leading the company to buy back more shares. It recently boosted its share repurchase authorization by 67% to $5 billion, which it expects to complete by the middle of 2026.
$70 oil is plenty of fuel for these oil stocks
Oil prices have slumped this year, which will cut into the cash flows produced by oil companies. However, Chevron and Devon Energy have such low-cost operations that they can generate plenty of cash at $70 crude oil to thrive. Furthermore, they're enhancing their ability to produce cash at lower crude prices by making accretive acquisitions. They look like great oil stocks to buy amid the current environment. They also should still produce solid returns while offering ample upside if oil prices rebound.
Should you invest $1,000 in Chevron right now?
Before you buy stock in Chevron, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Chevron wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $756,882!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 23, 2024
Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
