3 Oil Stocks for the Long-Term Investor
May 17th 2013 5:34PM
Updated May 17th 2013 6:45PM
The explosive growth of oil and gas production in the U.S. is enough to pique the interest of any investor. While the price of natural gas has remained stubbornly low, crimping profits, the price of oil, on the other hand, has remained rather elevated. That's producing profits for oil companies, making those stocks a temping investment opportunity. While there are many names that could do well, below are the three oil stocks that I think will treat the long-term investor very well.
With its large global asset base, ConocoPhillips is the largest of the U.S. independent E&P companies. Its global scale provides investors with a certain safety, as it's not as exposed to regional commodity price disruptions as the other oil stocks to follow. That provides more certainty that Conoco can fulfil its goal of growing its production and margins by 3%-5% annually through 2017.
Looking further ahead, ConocoPhillips has several projects in the exploration and appraisal phase that will deliver growth beyond 2017. If I had to pick one project that could be the most important, it's the company's Gulf of Mexico position. The company and its partners announced two major discoveries there this year and, given its large lease position, more future discoveries are quite likely. The following chart really puts its potential in the Gulf into perspective:
When you combine this with the company's 4.25% dividend, you can see why it's one of the best oil stocks for the long-term investor.
While just 24% of Devon's current production is oil, it's growing that portion of its business very rapidly. In the first quarter, total oil production jumped 14%. Two major projects drove this increase, with the Permian Basin leading the way, as oil production was up 24%, while Devon's Canadian oil sands Jackfish project saw an 18% increase in oil production. The only concern here is that, unlike ConocoPhillips, all of Devon's production is in North America, which has been hit by near-term pricing problems, especially in Canada.
That being said, Devon has the balance sheet flexibility to meet any near-term challenges, as it has $6.5 billion of cash in the bank. It's using its financial strength to invest to grow its oil production, and is targeting a mid-teens production growth rate this year. Longer term, Devon believes it can grow its Canadian oil sands production by 16% to 19% annually through 2020, which is what makes this company a top oil stock for the long-term.
While not as diversified, and therefore slightly more risky, Continental Resources is still a top oil stock for the long term. The company has drilled its way to the top of the Bakken, as it's that region's largest producer. It also enjoys a low cost to drill its wells, currently at just $8.3 million per well, which is a huge advantage over smaller drillers like Kodiak Oil & Gas , which spends $10 million to drill its Bakken wells.
In addition to being top-dog in the Bakken, Continental has an emerging position in the SCOOP oil play in Oklahoma. While not as oily as the Bakken, it's still a very high return play which, when added to the rest of Continental's resources, points to a very bright future. In fact, the company believes it can triple both production and reserves by 2017, which is what makes it one of the top oil stocks out there today.
Foolish bottom line
I've listed these companies in risk order, with ConocoPhillips being the least risky, and Continental, because of its concentrated operations, having the most risk. You could also look at things in reverse, and say that Continental has the most potential reward out of the oil stocks on this list, because of its premier position on the Bakken. Either way, I'd be shocked if, by the end of the decade, these three oil stocks haven't solidly beaten the market.
The other name I briefly mentioned, Kodiak Oil & Gas, is a dynamic growth story, as it offers great opportunities; but with those opportunities come great risks. While it missed my list of top oil stocks, that doesn't mean it couldn't make the list someday as it continues to grow. To learn more about Kodiak, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of updates and analysis as key news breaks. To get started simply click here now.
The article 3 Oil Stocks for the Long-Term Investor originally appeared on Fool.com.Fool contributor Matt DiLallo owns shares of ConocoPhillips. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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