3 Oil Stocks I'd Buy Right Now

By Matthew DiLallo Markets Fool.com

Image source: Getty Images.

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Thanks to two recent OPEC agreements designed to cut output and drain the market's oversupply, crude prices recently hit their highest point in over a year at more than $53 per barrel. Prices could continue running higher as those agreements go into effect because worldwide production had already been in decline while demand continues to march higher. That outlook sets the stage for much higher oil prices in the near term.

That said, OPEC has had troubles abiding by past agreements and the oil market remains in a fragile state. That means there's still plenty of risk for investors who are thinking about buying oil stocks these days. Because of that uncertainty, the three oil stocks that top my buy list can thrive no matter what crude prices do in the future.

The low-cost shale leader

No company is better positioned to handle the current oil market than leading shale producer EOG Resources (NYSE: EOG). Not only can it thrive at lower oil prices but it has tremendous flexibility to ramp up production to capture higher oil prices. The key to this is its growing inventory of premium drilling locations, which can deliver a 30% direct after-tax rate of return at flat $40 oil. Because of those returns, the company can do more than just survive lower oil prices.

In fact, at a $50 oil price, the company can grow its oil production by 15% compounded annually through 2020 and fund its dividend while living within cash flow. Furthermore, with roughly 6,000 premium locations, EOG has more than enough inventory to ramp output should crude prices go higher. According to the company, it could boost its oil growth rate to 25% compounded annually at $60 oil. Meanwhile, because its cash flow and drilling returns rise along with oil prices, EOG Resources could continue ramping up output should prices keep rising. That is unmatched growth potential for an oil company of this size.

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The flexible behemoth

Leading U.S. independent oil and gas producer ConocoPhillips (NYSE: COP) also spent the bulk of the oil market downturn focused on pushing down costs so it could thrive at lower oil prices. The net result is that the company reset its breakeven level from $75 oil to below $50 a barrel. In addition to that, the company reshaped its portfolio and capital allocation priorities to give it unparalleled flexibility.

Going forward, ConocoPhillips' focus will not be on growing production as much as it will be on increasing shareholder returns. Because of that, the company will prioritize raising its dividend and buying back stock over absolute production growth:

Image source: ConocoPhillips investor presentation.

As that slide notes, ConocoPhillips intends to increase both shareholder returns and production along with oil prices. Meanwhile, should prices fall, ConocoPhillips has the flexibility to ramp spending and buybacks down, which will enable it to maintain its financial strength. That level of flexibility for a company of ConocoPhillips' size is quite remarkable.

Didn't even blink

Unlike ConocoPhillips and EOG Resources, Pioneer Natural Resources (NYSE: PXD) never stopped growing production during the oil market downturn. The company really did not need to because it has minimal debt, robust oil hedges, and a prime position in the oil-rich Permian Basin. Those factors have Pioneer on pace to grow production by more than 14% this year while most rivals are just trying to keep output flat.

Also, thanks to its excellent balance sheet and recent asset sales, the company has the capital to continue growing at a brisk pace. In fact, Pioneer is on pace to boost output by 15% annually through 2020, with its oil production growing even quicker at 20% annually. While that growth trajectory requires the company to outspend cash flow in the near term, it can easily afford to do so because it has $2.9 billion of cash. Meanwhile, Pioneer should be able to deliver that growth while living within cash flow by 2018 as long as crude is over $55 per barrel. Furthermore, given its enormous resource base, Pioneer Natural Resources could accelerate its growth rate in the future should oil prices rise above that $55 level.

Investor takeaway

What I like about these three producers is the fact that they can thrive in a $50 oil environment, which means they have even more upside to higher oil prices. That flexibility to ramp production up or down in response to market conditions should lead to robust returns in an improving oil market while protecting an investor's downside if prices fall. It is flexibility and upside that few others in the industry can match right now.

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Matt DiLallo owns shares of ConocoPhillips. 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.