Oil prices have got off to a good start in 2021, advancing nearly 8% in the first week of the year, thanks to unexpected additional support from Saudi Arabia. This pushed crude above $ 50 a barrel for the first time since last February. While all oil companies will benefit from higher oil prices, some will produce a lot of money if crude maintains its current level above $ 50 a barrel. Here is a look at five oil stocks it could thrive this year if oil stays above this crucial price.
The deal will pay even bigger dividends
ConocoPhillips (NYSE: COP) agreed to buy rival Concho Resources (NYSE: CXO) in an all-stock deal valued at $ 9.7 billion in October. The main driver is that the merged company can reduce costs, allowing it to generate more cash at lower oil prices. For example, at $ 40 of oil, ConocoPhillips / Concho can produce a combined operating cash flow of $ 7.5 billion to $ 7.8 billion. That’s enough money to fund the capital needed to maintain their current production level and Conoco’s 3.8% dividend with leeway. At $ 50 worth of oil, the combined company can produce an additional $ 3 billion in cash. He could use that money to restart his growth engine by drilling more wells to boost production and return more liquidity to shareholders through share buybacks and special dividends.
A wave of dividends could be ahead
Devon Energy (NYSE: DVN) recently completed its merger with WPX Energy. This deal also cut its costs so that it could run just fine at $ 40 worth of oil. It could produce enough cash to maintain production and its base dividend which currently earns 2.4% at that price with some leeway. Devon Energy plans to use any free cash flow it produces at higher oil prices to improve its financial strength and pay a variable dividend. At $ 50 worth of oil, the company could generate up to $ 1.5 billion in free cash. Devon has said he could return up to 50% of his excess cash to investors via special dividends, implying monster payout potential this year.
The flexibility to flourish
EOG Resources (NYSE: EOG) All it takes is for oil to average $ 36 a barrel this year to maintain its current production rate and a 2.5% dividend. With oil prices well above this benchmark, it is well on its way to producing free cash flow. It could use those funds to pay down debt, buy back stocks, increase its dividend, or restart its growth engine. To put its options into perspective, even if it ramped up its drilling activity to increase production by 8% to 10%, it would still produce over $ 2 billion in free cash at $ 50 + oil. This gives it a lot of flexibility to improve its balance sheet and return more liquidity to investors.
Large special dividend potential
Pioneer natural resources (NYSE: PXD), like Devon and ConocoPhillips, merge with a peer to reduce costs. The combined company believes it can generate enough cash at an oil price of around $ 30 to maintain its 1.7% dividend and current production pace. He is on track to generate a massive amount of free cash if oil stays in the 1950s this year, and he plans to use those funds to reduce debt and follow Devon in moving to a variable dividend framework. . These special payments could significantly exceed its current base dividend.
Ready to become truly shareholder friendly in 2021
Marathon oil (NYSE: MRO) plans to be very disciplined in 2021. At $ 40- $ 45 oil, he expects to reinvest up to 80% of his cash flow to maintain production and use the remaining 20% to improve his balance sheet and support his. recently restored base dividend of 1.6%. Beyond this level, the company intends to allocate at least 30% of its cash flow to improving its financial profile and to shareholder-friendly activities such as share buybacks and dividends. specials. With crude oil currently in the 1950s, Marathon Oil could be very shareholder-friendly this year.
If oil prices hold, 2021 could be a very good year for oil stocks
Oil companies have focused in recent months on cutting costs, in part because of a wave of mergers. As a result, most are on track to generate enough cash at $ 40 of oil to keep their current production rates and dividends with some wiggle room, meaning they can produce a gusher of free cash at $ 50 of oil. While some could use it to increase production, most plan to return this windfall to shareholders through share buybacks and special dividends, which could largely reward their investors in 2021.