The economics of energy markets are changing rapidly. The shale revolution has put the U.S. well on the way to becoming one of the biggest oil exporters in the world in the next few years. If that happens, it will alter the dynamics of energy trade dramatically.
The International Energy Association estimates American total petroleum exports, including crude oil and refined products, such as gasoline and diesel, will reach about nine million barrels a day within five years, up from just one million in 2012. If that forecast turns out to be correct, it will put the U.S. ahead of Russia, and close to toppling Saudi Arabia from its long-held position at the head of the list of exporters of crude and refined products by 2024.
This highly optimistic outlook offers a good opportunity for long-term oil energy bulls to pick oil stocks which are well-positioned to benefit from the U.S. energy dominance, especially those companies that are in growth mode and have a wide capacity to process oil products. With this context in mind, below are two top energy stocks that fit nicely into this strategy.
1. Devon Energy: Sharp Focus on Growth
We like Oklahoma City-based Devon Energy Corp. (NYSE:DVN) stock to play the U.S. oil strength. The company is transforming its business structure to become a pure shale producer and has made returning excess cash to investors its key priority.
As part of its push to transform into a shale-focused growth company, Devon has offloaded more than $30 billion assets over the past few years. Last month, it announced it will complete this transformation by the end of this year after finalizing the last few transactions, including a complete exit from the Canadian oil sands.
"Devon is taking aggressive, meaningful and decisive steps to improve our operational and corporate cost structure," said Jeff Ritenour, executive vice president and chief financial officer in a statement. "The combination of selling higher-cost assets and bringing online new lower cost production, along with our commitment to at least $780 million in annual cost-reductions, is expected to drive down per-unit cash costs more than 20% by 2021."
According to Devon estimates, the producer can grow its U.S. oil production at a mid-teens annual rate with generating positive cash flows if oil trades at $46 a barrel and more. Devon plans to return that excess money to shareholders through dividend hikes and aggressive share buybacks. The company gave a 50% hike in payouts to investors over the last two years, and increased its share buybacks to $5 billion. Once completed, this massive share repurchase plan will reduce the company’s outstanding shares by 30%.
Oil investors love this combination, where companies can be cash-flow positive and have a strong bias for rewarding their investors with dividends. Trading at $31.60, Devon shares have surged almost 40% this year. The company pays $0.36 a share annual dividend with an annual yield of 1.14%
2. Exxon Mobil: A Giant Offering Diversification
If you want diversification in the oil and gas space, we think Exxon Mobil (NYSE:XOM) is your best bet. The company has impressive scale in everything from drilling to refining to the U.S. shale region. And while the stock is unlikely to produce massive gains for investors, it remains a top stock to buy if you're a long-term energy bull. The multinational oil and gas giant has also taken a forward-looking approach to improving its growth outlook, diverging from other large producers that are trying to stabilize their shares by cutting back on major spending.
Exxon's CEO, Darren Woods, believes the oil industry needs a significant injection of fresh investment to meet the new challenges it faces and has embarked on a $230 billion plan to revitalize the company, targeting drilling opportunities around the world.
These include shale wells in West Texas, natural gas export facilities in Papua New Guinea, a string of major discoveries in the South American nation of Guyana, and developments in Mozambique and Brazil.
Trading at $80.34 at yesterday's close, XOM shares have gained about 18% in 2019 and offer an annual dividend of $3.28 a share, with a yield of over 4%. With solid cash flows and a diversified portfolio of assets, Exxon Mobil is well-placed to benefit from the U.S. oil boom.
Bottom Line
There are a myriad of short-term factors that could play a pivotal role in deciding the direction of oil markets. But if your investment horizon is long-term, then you should focus on the companies that are able to survive the worst economic downturns and still deliver long-term value. We think both Devon and Exxon Mobil fit the bill.