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3 Oil Stocks to Buy Before It's Too Late

Motley Fool - Sun Sep 24, 7:15AM CDT

Oil prices have caught fire in recent months, surging 30% over the past 90 days. That rally has pushed crude prices over $90 a barrel. The main driver has been OPEC's decision to reduce its supply.

Oil could continue rising. However, most oil stocks have yet to catch the current wave and start rallying. That underperformance might not last much longer. Devon Energy(NYSE: DVN), Chevron(NYSE: CVX), and Marathon Oil(NYSE: MRO) stand out to a few contributors as the leading oil stocks to buy right now so that investors don't miss their potential rally.

Devon's performance-linked dividend is set to increase

Reuben Gregg Brewer (Devon Energy): Devon Energy is an onshore U.S. oil and natural gas producer. Its top and bottom lines are tied directly to energy prices, given the commodity nature of the energy business. West Texas Intermediate (WTI) crude, a key U.S. energy benchmark, has risen from around $73 per barrel in March to roughly $100 of late. That's a notable shift from the downtrend that was in place from mid-2022 to that March 2023 low point.

So, Devon Energy's financial results are likely to inflect higher again after a period of declines. That's good news, and investors should be pleased to hear it. But there's a nuance to this story, because Devon Energy has tied its dividend to its financial performance. That, effectively, ties the dividend to energy prices. When oil prices were falling, the dividend was, too. Now that oil prices are on the rise, the dividend is likely to inflect higher again in short order.

DVN Dividend Per Share (Quarterly) Chart

DVN Dividend Per Share (Quarterly) data by YCharts

While there's no way to really know where the dividend will go, the last time WTI oil prices were in the $100-per-barrel range, the dividend was around $1.00 per share per quarter. That's a big increase from today's $0.49 per share. So shareholders could see a big bump in Devon Energy's dividend in the very near future.

Down, but poised to rebound

Matt DiLallo (Marathon Oil): Shares of Marathon Oil are currently down about 20% from their 52-week high. That slump comes even though oil prices have risen nearly 10% over the past year (and have surged recently), while the market has also delivered a double-digit gain.

Marathon has been capitalizing on the sell-off in its stock. It has repurchased over $700 million of its shares through the second quarter. That brought its total to $4.2 billion in shares over the last seven quarters. This repurchase program has retired an astounding 24% of Marathon's outstanding share. That's the biggest share count decline in the oil patch over the period.

Marathon's oil-fueled cash flows should rise in the coming months, giving it more money to repurchase its shares. Marathon aims to return 40% of its cash flow to shareholders through dividends and repurchases when oil exceeds $60 a barrel. It pays a base dividend it can sustain at $40 a barrel, and it uses share repurchases to return any excess cash flow to shareholders to achieve its 40% return target. Marathon currently has $1.8 billion remaining on its existing repurchase authorization, enough to gobble up more than 10% of its outstanding shares at its current market cap, and it will probably reload that program after its completion.

That combination of growing cash flows and a likely acceleration in its repurchase rate could drive shares much higher in the coming quarters. It makes Marathon look like an appealing oil stock to buy before what could be a big rally.

A rock-solid oil stock for the long term

Neha Chamaria(Chevron): Because Chevron is an oil and gas producer, crude oil price is the single largest variable that affects its numbers. Higher oil prices can not only boost Chevron's upstream earnings and cash flows but also improve its liquidity and financial standing. Yet it's only when you see the kind of impact that oil prices can have on Chevron's cash flows that you begin to realize why this stock is such a great buy.

Between 2022 and 2027, Chevron expects to grow its free cash flow (FCF) by an average annual growth rate of at least 10% at a Brent crude price of only $60 per barrel. Brent crude is currently hovering above $90 a barrel. If oil prices can sustain momentum for the better part in the near term, Chevron's FCF could grow at a much faster clip unless it increases its capital spending outlay. Right now, Chevron projects its capital expenditure to be around $14 billion for 2024 and anything between $14 billion and $16 billion between 2024 and 2027.

Chevron is also targeting a return on capital employed (ROCE) of more than 12% through 2027 at $60 Brent. That looks doable, considering that Chevron's ROCE hit a 12-year high of 20% last year. Chevron's ROCE has also grown at a faster rate than peers like ExxonMobil in the past five years.

As long as Chevron's cash flows grows, so should dividends since dividend growth is a top priority for management when it comes to allocating capital. Like ROCE, Chevron's dividend per share also grew at a faster compound annual growth rate than peers in the past five years. With Chevron's stock yielding 3.6% and still trading cheap, there's still time to own this rock-solid oil stock before it's too late.

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Matthew DiLallo has no position in any of the stocks mentioned. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.

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