After an ugly and protracted downturn that's lasted far longer than almost anyone expected, oil prices are starting to creep up. Both Brent and West Texas Intermediate crude futures are up about 20% in the past few months, putting crude at the highest levels in more than two years.
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That's not to say oil prices can't -- or won't -- fall again. If there's anything investors should have learned by now, it's that oil prices can always go lower. But at the same time, the companies still operating have largely figured out how to make money at far lower oil prices than they needed in the past.
Three of our energy-industry contributing investors who have followed the oil market since before the turndown have identified three stocks they think are top buys right now: ConocoPhillips (NYSE: COP), Cheniere Energy Partners LP (NYSEMKT: CQP), and Core Laboratories N.V. (NYSE: CLB). Not only have these companies survived the downturn, but they're built to make money in the current environment and have very real catalysts that could help their profits soar.
Built for this market
Matt DiLallo (ConocoPhillips): Last year, ConocoPhillips laid out an ambitious strategy to turn an already strong oil company into an even stronger one. However, instead of taking three years to get to that top-tier level, the company laid the entire groundwork in less than a year by jettisoning several high-cost assets, and using that cash to pay down debt and buy back stock. As a result, the company can excel no matter what the oil market throws at it.
With oil at $50, for example, ConocoPhillips can generate enough cash flow to increase production by a 5% compound annual growth rate, while paying a growing dividend and buying back about $1.5 billion in stock per year. Meanwhile, if crude slumps into the $40s, the company can still generate enough money to maintain its current production rate and dividend. That's quite an impressive feat, since many rivals need oil in the mid-$50s just to sustain their current production rate.
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Because the company thrives at lower oil prices, it has even more upside as prices improve. With oil at $60, for example, the company's current operating plan would generate several billion dollars in excess cash, giving it more money to return to investors and reinvest in high-return growth projects.
ConocoPhillips has turned itself into a cash-flow machine. That positions it to deliver a compelling growth rate, as well as return boatloads of cash to investors at current oil prices. That combination should fuel excellent returns over the long term, even if crude doesn't recover any further. There's also ample upside potential if it does.
Dividend increases coming to a portfolio near you
Tyler Crowe (Cheniere Energy Partners): With a dividend yield of more than 6.2%, Cheniere Energy Partners looks rather compelling. The company has completed all four liquefaction trains for phase one of its Sabine Pass liquefied natural gas (LNG) export facility in Louisiana. As a result, the facility is generating enough cash flow to meet all of the financial milestones necessary to start increasing its dividends, even with that substantial yield.
What's most impressive about this feat is that the company has been able to do so with only three of its four liquefaction trains fully operational. That's about to change, though, as management announced substantial completion of train four in early October. While we won't see the impact of this train in its third-quarter results, we'll most certainly see an increase in revenue over the next few quarters as it sells LNG to the spot market and starts its 20-year contract with GAIL (India) Limited in March.
On top of the immediate payout bump we're likely to see with the completion of train four, we're less than two years away from the completion of train five, which will likely result in another significant increase. Beyond that, growth is a little less clear, but options include a sixth train that's awaiting a final investment decision, or the possibility that parent company Cheniere Energy (NYSEMKT: LNG) drops its Corpus Christi facility further down the road.
Either way, today's already attractive payout is likely due for some significant increases in the near future. For investors, that makes November an opportune time to pick up shares.
This oil-patch technology leader keeps making money
Jason Hall (Core Laboratories N.V.): For businesses providing services in the oil patch, it's been a hard few years. That's been the case for Core Lab, which has seen profits fall sharply. But while many of its peers have struggled to break even since oil producers cut spending in 2015, the company has continued to make money and generate positive free cash flows:
How has Core Lab pulled this off? In short, by being a different kind of company.
While most oil-field service providers tend to be "picks and shovels" businesses, either selling or operating the equipment that drills for, produces, or transports oil and gas, Core Lab is in the data analysis business. Its most important assets are the technology and intellectual property that it uses to help oil and gas producers get more product out of each reservoir more quickly and cheaply. This "asset light" model means Core doesn't have the high fixed costs of heavy equipment, and its services are still important when oil is cheap. If there are lower costs, the company still can sell a still-important service.
Looking forward, the company is well-positioned to profit. Oil prices are creeping up, and more producers are focused on higher returns, which should drive increased demand for Core's services. This should drive strong incremental profit growth that could make Core Lab's current stock price look cheap within a few years.
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Jason Hall owns shares of Core Laboratories. Matthew DiLallo owns shares of ConocoPhillips and Core Laboratories. Tyler Crowe owns shares of Core Laboratories. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.