Among the 11 sectors within the stock market, energy is making quite a splash this year—climbing 7.9% up to now, a noteworthy contrast to the S&P 500’s (SNPINDEX: ^GSPC) 5.1% drop.
This rise might catch some off guard, especially considering that West Texas Intermediate, the benchmark for U.S. oil, currently sits at $69.36 per barrel, noticeably lower than the 2024 average of $76.63. Yet, key oil and gas companies offer a sturdy refuge for investors amid the cloud of economic uncertainties and lingering trade tensions.
The standouts in this realm are ExxonMobil (XOM -7.35%), Chevron (CVX -8.37%), and ConocoPhillips (COP -9.47%)—three stocks that offer a balanced appeal with their robust dividends.
Boosting Cash Flow
ExxonMobil, Chevron, and ConocoPhillips are all marching towards robust free cash flow (FCF) even at today’s oil prices. They’ve masterfully tightened efficiency and sliced costs throughout their operations, allowing them to amass substantial FCF, even when oil prices aren’t at their peak.
ExxonMobil’s five-year strategy aims for breakeven at a mere $30 per barrel of Brent by 2030, projecting a hefty $110 billion in surplus cash through that year, even if Brent averages only $55 a barrel. Currently priced at $73.63 per barrel, Brent generally trades several dollars above WTI.
With Brent settling around $70, Chevron anticipates generating $5 billion in FCF by 2025 and hitting $6 billion in 2026, encompassing fixed loan payments and quarterly dividends. In Chevron’s fourth-quarter 2024 earnings reveal, they expect to boost annual FCF by $10 billion over the upcoming two years, with about 75% of Chevron’s oil ventures breaking even at below $50 per barrel Brent.
ConocoPhillips is channeling elevated capital expenditures into long-distance projects, with anticipated outcomes involving an additional $6 billion in FCF, provided WTI maintains a $70 level. The purchase of Marathon Oil in November could significantly spike FCF in the coming years.
Growing Capital Return Programs
These companies are flaunting their FCF prowess—able to incrementally boost dividends and buy back substantial volumes of stock.
ExxonMobil impressed shareholders with $36 billion in returns for 2024—divvying out $16.7 billion in dividends and executing $19.3 billion in buybacks. It’s on track to sustain its $20 billion annual share purchase plan through 2026, boasting 42 consecutive years of dividend raises.
Chevron, between 2022 and 2024, returned over $75 billion to shareholders, marking a $27 billion record last year with $11.8 billion in dividends and $15.2 billion in buybacks, extending its winning streak of annual dividend hikes to 38 years.
ConocoPhillips channeled $9.1 billion back to shareholders in 2024, allocating $3.6 billion through dividends and $5.5 billion in buybacks. An additional $10 billion return is on the books for 2025. Although its dividend history pales compared to ExxonMobil and Chevron, ConocoPhillips has simplified its dividend approach, increasing the ordinary dividend to $0.78 per quarter per share, yielding 3.1% versus ExxonMobil’s 3.4% and Chevron’s 4.1%.
Even amidst hefty yields, the firms allocated more to buybacks in 2024 than dividends, emphasizing their FCF prowess. The flexibility of buybacks provides a cushion should oil prices slip. History shows ExxonMobil and Chevron have cut or paused buybacks during downturns but continued elevating dividends, solidifying them as reliable passive income investments.
In conclusion, all three companies are excellently positioned for substantial buybacks and attractive dividend offerings, a favorable prospect as other sectors lag and strain to maintain high yields.
Solid Balance Sheets
It’s noteworthy that while ExxonMobil, Chevron, and ConocoPhillips prioritize capital returns, they’re not compromising their financial standing at all.
Each boasting debt-to-capital (D/C) ratios nearing decade lows underscores their financial prudence.
The D/C ratio is crucial, gauging a company’s leverage and reliance on debt. Within the capital-heavy oil and gas sector, some entities leverage to accelerate growth—a risky venture amplifying potential losses. Opting to back operations and capital expenditures with FCF mitigates risks, enabling the balance sheet to better absorb debt should downturns occur.
Reasonable Valuations
Valuation-wise, ExxonMobil, Chevron, and ConocoPhillips feature attractive metrics—boasting low price-to-earnings and price-to-FCF ratios, flagging them as good bargains.
However, it’s worth noting these ratios reflect trailing-12-month data. With oil prices poised to underperform their 2024 levels in 2025, margins may bear a slight dip short-term. Yet, expansion and acquisition efforts may still foment earnings and FCF upticks, even if oil prices tumble.
With industries like oil and gas, extreme valuation swings due to market cycles warrant cautious attention. Nonetheless, these measures serve as a sensible benchmark for how companies should be valued under normal conditions rather than extremes.
Consider These Steady Stocks
ExxonMobil, Chevron, and ConocoPhillips are strategically poised to consistently expand cash flows, sharing the wealth with investors via buybacks and dividends. Yielding significantly more than the S&P 500’s 1.3% average, they’re compelling candidates for anyone aiming to enhance passive income streams.
Though energy isn’t your typical ‘safe’ sector alongside utilities or healthcare, heavyweights like ExxonMobil, Chevron, and ConocoPhillips stand as reliable choices thanks to their solid balance sheets and sustainable payouts.
