3 Top Oil Stocks to Buy Now

By Markets Fool.com

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While the rising tide of higher oil prices is lifting all boats in the oil market, some producers are in a much better position to turn these higher prices into value for investors over the long term. That is because they have the combination of prime locations in the best shale plays, low costs, and the balance sheet flexibility to fuel robust growth going forward now that crudeoil is above $50 a barrel. The list of companies fitting that criteria is pretty short, with EOG Resources (NYSE: EOG), Diamondback Energy (NASDAQ: FANG), and Concho Resources (NYSE: CXO)in that top tier making them greatoil stocks to consider buying now.

The shale king is rising again

EOG Resourcesis one of the leading oil producers in America thanks to its prime positions in the Eagle Ford, Bakken, and Permian Basin. That said, its focus in recent years has been on improving operations to boost drilling returns so that it can thrive on lower oil prices. Through a combination of factors, including a focus on innovation and technology as well as vertical integration, the company pushed costs down and hydrocarbon recoveries up. The net result is that it controls a vast inventory of premium wells, which are those it can drill to earn a 30% rate of return at $40 oil.

Things get compelling once oil is sustainably over $50 a barrel because the returns on EOG Resources' premium wells double to 60%. As a result, the company can generate more cash flow, which puts it in the position to deliver 10% compound annual oil production growth through 2020. That is a robust growth rate for a company of EOG Resources' size and should fuel healthy returns for investors over the long term.

Coiled and ready to strike

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Diamondback Energyhas likewise focused on getting its costs down and its hydrocarbon recoveries up. As a result, the company recently reported that it is now in the position to "drive multi-year organic growth, within cash flow on our existing asset base."

Driving that forecast is the company's high-margin position in the Permian Basin that should provide it with the capital to invest up to $650 million in capex next year as long as oil remains above $45 per barrel. That is enough money to drill as many as 120 wells, up from the 70 wells it plans to drill this year. Those incremental wells should boost Diamondback's output by 30%, which is an acceleration from the 22% year-over-year growth rate it delivered during the third quarter. Diamondback's ability to deliver robust production growth while living within its cash flow at sub-$50 oil is a remarkable accomplishment.

Ready to pivot back toward growth

Concho Resources shares many similarities with EOG Resources and Diamondback Energy. Like EOG, Concho pressed pause on growth over the past couple of years to focus on pushing its costs down so that it could run sustainably at lower oil prices. Meanwhile, like Diamondback, it has a prime position in the lucrative Permian Basin, which gives it a springboard to drive growth going forward.

As a result, Concho Resources is targeting to deliver 20% oil production growth next year, while investing within its cash flow. That is quite a shift for the company, which as the slide below shows, had been outspending cash flow by quite a large margin:

Data source: Concho Resources investor presentation.

What's noteworthy about that slide is the dramatic shift in capital efficiency over the past year as a result of significant reductions in both drilling and operating costs. Because of that, Concho is in the position to restart production growth next year while many rivals have yet to hit the pivot point of generating enough excess cash flow to boost output.

Investor takeaway

The reasons these three oil stocks are poised to reaccelerate production growth next year is due to their prime positions in America's best shale plays as well as their ability to drive down costs. Those two factors, when combined with their solid balance sheets, give them the financial flexibility to start growing again while many of their rivals are still just trying to regain their footing. It is that unique ability to grow at a time when most other oil companies cannot that makes these three compelling buys today.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. 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.