ConocoPhillips (NYSE: COP) is the kind of energy company that people generally think about when they think about an oil stock. However, for most investors, ConocoPhillips won’t be the best oil stock to buy. Here’s why, and here are two better choices right now (and in most situations for most investors).
ConocoPhillips describes itself as “one of the world’s largest independent E&P companies.” That basically means that it drills for oil and natural gas (exploration and production), which is what is known as the upstream of the broader energy sector. Since getting oil out of the ground is Conocophillips only revenue source, there are some important things that investors need to understand before buying this or any pure-play upstream stock.
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Its top and bottom lines are entirely dependent on commodity prices. That’s great when energy prices are strong, but it is terrible when energy prices are weak. Since oil is an inherently volatile commodity, prone to dramatic and sometimes swift price swings, ConocoPhillips’ financial results and stock price can both be very volatile, too.
As a case in point, energy prices have been weak of late, and so, too, has ConocoPhillips’ stock price. Most investors will be better off with a more diversified approach if they want to own an oil stock.
This is where integrated energy giants like Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) come in. They operate across the entire energy landscape, from the upstream through the midstream (pipelines) and into the downstream (chemicals and refining). Although oil prices are still a huge determinant of their financial success, adding the other two segments to the mix helps to soften the ups and downs. Notably, the downstream often benefits from low energy prices because oil and natural gas are key inputs.
However, being integrated energy companies isn’t the only story here because that isn’t unique. What really sets Chevron and Exxon apart are their dividends, which have been increased annually for 38 and 43 years, respectively. Those are impressive streaks, given the inherently volatile nature of the energy sector. Collecting Exxon’s 3.7% dividend yield and Chevron’s 5% can help you pay your bills and make it easier to stick around when oil prices are weak.
That said, there’s one more key fact to understand about Exxon and Chevron. They both have rock-solid balance sheets. Being financially strong allows them to take on debt when times are tough so they can continue to invest in their businesses and pay their dividends. When energy prices improve again, as they always have, historically, leverage is reduced. With debt-to-equity ratios of around 0.15x, Exxon and Chevron stand well apart from their closest peers on this metric. These two energy giants stand ready to take on the next downturn.
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