Oil prices have fallen in recent months. West Texas Intermediate, the most important benchmark for the US oil price, was recently around $70 per barrel. That’s well below the peak of more than $85 a barrel a few months ago, due to healthy supply amid demand concerns from a possible slowdown in the global economy.
While falling oil prices will impact oil companies’ profits, so will several producers well equipped to achieve lower prices. Chevron (NYSE: CVX) And Devon Energy (NYSE: DVN) are distinguished by their ability to thrive in lower oil prices. That’s what makes them great oil supplies buying in the current environment.
Built to run on lower oil prices
Chevron has built a privileged global commodity portfolio. That allows the country to earn high profit margins and returns on its investments, meaning it can still thrive in lower oil prices.
The integrated global energy giant has stress-tested its portfolio at much lower oil prices. A downside scenario assumes a flat oil price of $50 between 2025 and 2027. Under that bear case scenario, Chevron would generate enough cash flow from operations to cover its growing dividend and make planned capital expenditures to grow production 3% annually . In the meantime it can be very cash rich balance sheet to buy back shares at the lower end of the $10 billion-$20 billion range annual target range. That’s enough to retire about 3% of the population outstanding shares every year.
Meanwhile, the company’s upside scenario assumes a flat oil price of $70 from 2025 to 2027. In that environment, Chevron could buy back shares at the high end of its target range, enough to retire 6% of its outstanding shares each year . That price level would also be enough to grow free cash flow by more than 10% annually.
Chevron works to further improve its ability to thrive in lower oil prices through acquisitions Hes. While a dispute with ExxonMobil If this deal is delayed, it would significantly strengthen and expand Chevron’s production and free cash flow growth profile. At $70 oil prices, adding Hess would more than double Chevron’s free cash flow by 2027.
The stock fell double digits last year due to lower oil prices and the postponed Hess dealChevron looks like a bargain. Are particularly attractive for income-seeking investors, given the dividend yield of almost 4.5%.
Dirt cheap, and do something about it
Devon Energy has built a premier multi-basin oil and gas business in the US. Growing scale has reduced costs and increased profitability. The company’s current breakeven financing level is $40 per barrel.
That means Devon can generate significant free cash flow of $70 per barrel. The free cash flow yield at that price is about 9%. That’s more than double the free cash flow yield of the S&P500 and three times as much as the Nasdaqimplying that Devon’s stock is dirt cheap.
Devon is working to increase its scale and profitability by acquiring Grayson Mill Energy to strengthen its position in the Williston Basin. The acquisition adds high-margin production, enhanced by the region’s midstream infrastructure. The very positive acquisition will further increase Devon’s free cash flow, even at lower oil prices.
Despite the ability to print cash at a $70 oil price, Devon shares are down nearly 25% from their peak earlier this year. That causes the company to buy back more shares. The company recently increased its share buyback authorization by 67% to $5 billion, which is expected to be completed by mid-2026.
$70 oil is plenty of fuel for these oil stocks
Oil prices have fallen this year, which will reduce oil companies’ cash flows. However, Chevron and Devon Energy have such cheap operations that they can generate enough money for $70 crude to thrive. Moreover, they increase their production capacity cash at lower crude oil prices by making positive acquisitions. They look like great oil stocks to buy in the current environment. They should also still deliver solid returns while offering plenty of upside potential if oil prices rebound.
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Matt DiLallo has positions in Chevron. The Motley Fool holds positions in and recommends Chevron. The Motley Fool has a disclosure policy.
The 2 Best Oil Stocks to Buy During Crude’s Slump to $70 a Barrel was originally published by The Motley Fool
