Iran Conflict Drives Oil Prices Up — 3 Energy Stocks to Gain

Key Points

• ConocoPhillips only needs oil in the mid-$40s to fund its capital spending plan this year.
• EOG Resources can generate a return of more than 100% on new wells drilled at $55 oil.
• Diamondback Energy can maintain its current production rate at $30 oil.
• 10 stocks we like better than ConocoPhillips ›

Rising Oil Prices and Their Impact

Oil prices have surged this year due to the conflict with Iran. Brent, the global oil benchmark, has increased from $60 to over $100 a barrel, marking an increase of more than 70%. Crude prices are expected to continue rising as long as the war persists, directly affecting the oil market. Iran has blocked a key oil shipping lane and attacked oil infrastructure in the Persian Gulf.

This surge in crude prices is beneficial for all oil stocks. Here are three energy companies that are built to profit from higher oil prices.

ConocoPhillips

ConocoPhillips (NYSE: COP) has developed a world-class portfolio of low-cost resources. The oil giant only requires oil to be in the mid-$40s this year to generate enough cash to fund its capital program. Additionally, it only needs another $10 a barrel to fund its dividend. Last year, the company generated $7.3 billion in free cash flow when crude prices were in the mid-to-high $60s, which covered its $4 billion in dividend payments with plenty left over.

The company expects to generate an additional $1 billion in free cash flow this year due to lower capital spending and other cost reductions. With oil prices soaring, it will produce even more excess free cash. ConocoPhillips is likely to return this windfall to shareholders by repurchasing additional shares. The company also plans to deliver dividend growth among the top 25% of dividend stocks in the S&P 500.

EOG Resources

EOG Resources (NYSE: EOG) is a leading U.S. oil producer. What sets EOG Resources apart from its peers is its low-cost, high-return operations. The company can drill new wells in the U.S. at an average direct after-tax rate of return exceeding 100% at $55 oil. It has also become increasingly efficient at producing oil, allowing it to steadily reduce costs. Over the past year, it has reduced its average well costs by 7%, while delivering a 4% reduction in operating costs.

As a result, EOG Resources can make significant profits at lower oil prices. For example, the company expects to generate $10 billion in cumulative free cash flow over the next three years at $55 oil. That number would rise to $18 billion if crude averages $70 a barrel, which is $3 billion more than it made in the last three years when oil averaged $73 a barrel. With crude now in the triple digits, EOG can make even more money, giving it more cash to return to shareholders. Since it already has a pristine balance sheet, the oil company can return up to 100% of its free cash flow to shareholders through dividends (regular and special) and share repurchases this year.

Diamondback Energy

Diamondback Energy (NASDAQ: FANG) is a leading oil and gas producer focused on the prolific Permian Basin. It has built one of the largest-scale positions in the region, providing it with a competitive advantage. It has one of the lowest breakeven levels in the region, requiring oil to average only $30 a barrel to generate enough cash to drill the wells needed to maintain its current production rate. Meanwhile, it can cover its current dividend at $37 a barrel.

The company’s low breakeven level allows it to generate substantial cash even at lower oil prices. For instance, it can generate over $3.1 billion in free cash flow at $50 oil and more than $6.7 billion if crude averages $80 a barrel this year. The company plans to retain half of its free cash flow to strengthen its already solid balance sheet and return the other half to shareholders through dividends (regular and variable) and share repurchases.

Cashing in on Higher Crude Oil Prices

ConocoPhillips, EOG Resources, and Diamondback Energy built their businesses to operate efficiently on sub-$50 oil. As a result, they are currently reaping the benefits as crude prices reach triple digits. Most of these oil companies are likely to return this windfall to shareholders through higher dividends and more share repurchases, further enhancing shareholder value.

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Matt DiLallo has positions in ConocoPhillips. The Motley Fool recommends ConocoPhillips and EOG Resources. The Motley Fool has a disclosure policy.