The 1 Perfect Stock to Invest in Big Oil

By Tyler Crowe, Jason Hall, and Matthew DiLallo Markets Fool.com

With the oil and gas industry back on the mend, there are ample opportunities for investors to benefit from the upturn. Some of those opportunities are more speculative than others, but one of the surer bets is to buy into big oil. These integrated giants have the double benefit of seeing decent gains from the rise in oil and gas prices, but they also throw off lots of cash to investors in the form of dividends.

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So, we asked three of our contributors to each highlight a big-oil stock they see as a great investment today for the industry turnaround and beyond. Here's a quick run-down as to why they picked Phillips 66 (NYSE: PSX), Total SA (NYSE: TOT), and Occidental Petroleum (NYSE: OXY).

Image source: Getty Images.

Moving the oil and making the products means less risk, solid prospects

Jason Hall(Phillips 66): The most risky part of investing in oil stocks is how quickly oil prices can fall and shock the entire industry. And since the shock is first -- and often longest -- felt at oil producers, a great way to reduce your risk is to avoid companies involved in oil production. It just so happens that Phillips 66 is a big-oil superstar that does all of the things that happen to oilaftersomeone else has spent the money to find it and drill for it.

While its more vertically integrated peers typically operate exploration & production segments, Phillips 66 -- since splitting fromConocoPhillipsin 2012 -- is a refiner, refined products marketer, midstream/logistics provider, and petrochemicals manufacturer. This structure, for most investors, makes it an ideal company to buy and hold without having to worry as much about the gyrations of oil prices.

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Since the company doesn't produce the products, it buys oil and natural gas to refine into things like gasoline and jet fuel, and to make plastics and chemicals used by other industries. But in general terms, it's able to pass higher input prices along to its customers.

Management has done a solid job investing for growth while still focusing on its shareholders. The company has steadily grown its dividend, while also repurchasing 17% of shares outstanding since going public.

If you're looking for an ideal big-oil stock for the long term, Phillips 66 is as perfect a choice as you'll find.

Emerging as the best in the business

Tyler Crowe (Total SA):Total is rarely mentioned as one of the top dogs in the big-oil business. Its smaller size and high exposure to offshore oil and gas suggest that it would have higher costs than most of its peers and would generate lower rates of return. That isn't the case, though; the company has shown during this most recent oil market downturn to be one of the better-positioned companies for the next few years and beyond.

Not only has the company been able to grow its oil and gas production by 14% over the past two years, but it has also announced that it can cover all of its capital spending and dividend payments with cash from operations with oil at less than $50 a barrel. Only one other integrated oil major, ExxonMobil, claims it can accomplish this feat at such a low oil price.

Also encouraging are some of the moves the company is making for its future. Total has been very aggressive in signing production and operation contracts with national oil companies in the Middle East. National oil companies in this region have vast reserves but don't necessarily have the technology or development capital to access them, so Total gets a cut of these very low-cost barrels in exchange for developing the fields. Total is also being very aggressive with developing a greater refining and retail presence in the Middle East and Africa, two regions where refined product consumption is growing fast and competition is rather low.

Even today, with oil prices at $55 a barrel, Total is producing the best returns on equity in the business. With its plans to grow production another 4% this year and further development of these growing product markets, it's pretty easy to make the case that Total is the best among the big-oil bunch as of late.

A stable foundation with plenty of upside

Matt DiLallo (Occidental Petroleum): The draw of investing in a typical big oil stock is that they tend to be safer investments. These companies often operate both oil and gas production assets as well as counter-cyclical refining and marketing assets, which enable them to generate steadier cash flow and consistent dividend growth. The trade-off for this consistency is a much slower growth rate compared to independent exploration and production companies.

That said, there is one company that seems to offer the best of both worlds: Occidental Petroleum. While Occidental Petroleum doesn't own any refining assets, it does own a chemicals business that benefits from lower commodity prices and generates gobs of free cash flow. Further, it owns several assets that deliver stable production, such as enhanced oil recovery facilities in the Permian Basin and a stake in the Al Hosn gas project in the Middle East.

Occidental Petroleum compliments the relative stability of those assets with the enormous growth potential of its Permian Basin resource position. The company controls a vast legacy acreage position across the Basin, which it has started to develop using newer horizontal drilling techniques. This shift has proven to be a game-changer for the company, which believes it can grow production from this resource by a 20% to 30% compound annual growth rate over the next three years. That would enable Occidental to deliver companywide production growth of 5% to 8% per year, which is a higher growth rate than most other big-oil companies. Further, it can achieve that growth while maintaining a strong balance sheet and paying a consistently growing dividend. It's that unique combination of stability and a faster growth rate that makes Occidental the perfect big-oil stock, in my opinion.

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The author(s) may have a position in any stocks mentioned.

Jason Hall owns shares of Phillips 66. Matt DiLallo owns shares of ConocoPhillips and Phillips 66. Tyler Crowe owns shares of ExxonMobil and Total. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Total. The Motley Fool has a disclosure policy.