Oil stocks have long been a popular investment choice, and identifying the best oil stocks is crucial for savvy investors. Oil has been the lifeblood of economic activity since the invention of the internal combustion engine. It is also the building material for petrochemical products like composites and plastics, used in everything from pipes to car interiors and packaging.
Some headlines suggest that we are going to stop using oil very soon. Even the IEA (International Energy Agency) report has titles like “Era of fossil fuel growth may soon be over”.
Examining the best oil stocks is essential when looking at the graph below, as it becomes clear that even in a rather optimistic and “green” forecast, oil demand is not going anywhere, at least in volume. The growing energy demand is fulfilled by new energy sources, while oil demand stays stable or even grows for decades to come.
⛽️ Learn more: For those seeking clarity on the dynamics of the oil and gas industry, our recent article provides a thorough breakdown.
Best Oil Stocks in 2024
Oil demand is expected to persist, and it makes sense to focus on oil companies that have strong production and are able to provide the world with energy for the future. As energy as a sector is still out of favor, oil companies are often undervalued or distributing generous dividends.
So let’s look at the best oil stocks.
This list of the best oil stocks is designed as an introduction, and if something catches your eye, you’ll want to do additional research!
⛽️ Learn more: For anyone wondering about the current state of gas prices, our latest post breaks down the top 18 related questions.
1. Exxon Mobil Corporation (XOM)
At the top of our list of best oil stocks, Exxon is one of the largest oil companies in the world by market cap, only behind the mostly state-owned Saudi Aramco. It owns assets both upstream (oil & gas production) and downstream (refineries).
In Q1 2023, Exxon produced 3,831 Koebd (thousands of oil equivalent barrels per day). If the company was a country, it would be the 7th largest oil producer in the world, just behind Iraq.
Exxon distributed $30B to shareholders in 2022, supported by a strong ROCE (Return On Capital Employed) of 25%.
With high dividends, and a solid growth profile both in the US and abroad, Exxon is an obvious way for investors to bet on oil.
And while green-minded activists tried to “take over” the company in 2021, it seems that so far, these efforts have brought little results. So for the foreseeable future, Exxon is likely to stay a major oil & gas producer and generate steady cash flows from fossil fuel production, making it one of the best oil stocks on the market.
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2. Petróleo Brasileiro S.A. – Petrobras (PBR)
Petrobras is the national oil company of Brazil, a country on its way to becoming the world’s 4th largest producer of oil.
The company produced 2,68 Koebd or 71% of Exxon’s production but for a market cap worth less than a quarter of the American oil giant’s.
This underperformance of the stock is not linked to the business side, with steadily growing oil production and solid profitability, allowing for record-breaking dividend yields.
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The company has also used this renewed profitability to reimburse debt bringing net debt from $79B in 2019 to $37.6B in Q1 2023.
On the other hand, Brazil is a country with serious reputational problems among investors, and the recent election of socialist Lula to the presidency has spooked markets. Riots storming several government buildings by his opponent’s supporters did not help either.
The costs of decarbonization plans and expanding the petrochemical activities could reduce the company’s profitability in the long term.
So this is a stock with significant political risk and trading at an accordingly severe discount.
When it comes to the best oil stocks, Petrobras stands out as a top contender IF the political situation remains stable. And that could be a big ‘if”. This should make any investors cautious and looking to diversify, despite dividend yields that beat almost every other stock on the market.
3. CNOOC Limited (0883.HK)
CNOOC is the Chinese national oil & gas company in charge of offshore exploration. It is mostly produced from fields in the Bohai Sea (next to Korea) and in the South China Sea. It also owns a 25% participation in the Guyana offshore deposits of 8 billion barrels, together with Hess and Exxon.
It is planning to spend big in 2023 with a growing capex budget of $15B, mostly focused on development and exploration, of which a quarter is overseas.
The company is planning to boost its gas production, thanks to expected gas fields in the South China Sea (“Trillion-Cubic-Meters-Level Gas Fields”) and “China Onshore 100 billion cubic meters Shale Gas Resources”.
CNOOC targets to increase its production from its 2023’s 650 mmboe to 740 mmboe by 2025.
The company is trading relatively cheaply, especially considering its growth profile, due to the possible risk of sanctions and US-China geopolitical sanctions. As a result, it offers a high dividend yield and low P/E, as well as risks that are very real but very difficult to quantify.
👉 Learn more: The ongoing USA-China dynamics have various market ramifications. Our recent piece offers detailed insight.
4. EOG Resources, Inc. (EOG)
US oil production was once considered to be in a terminal decline starting in the 1980s. This all changed with the shale oil revolution, which turned the US back into the world’s leading massive energy producer.
This led to a frenzy of growth in production, with oil prices crashing in 2014 and again in 2020 when demand collapsed due to the pandemic. Since then, shale companies have refocused on shareholders’ returns and production costs instead of growth at all costs.
EOG, one of the best oil stocks, is a major shale producer, producing 908 Koebd in shale basins and most oil regions of the USA, minimizing geopolitical risk.
EOG has consistently raised its dividend, with a 22% CAGR since 1999, and has never interrupted or reduced the dividends, even when most of the shale oil industry was doing so or going bankrupt. With a current net debt of -$1.2B, this makes the company feel rather safe and shareholder-friendly compared to its peers.
5. Transocean Ltd. (RIG)
While the whole energy/fossil fuel sector suffered in the 2010s, none did as badly as the oil & gas services sector, especially the offshore sub-segment. With oil & gas prices down, most producers cut severely on capital expenditure. And while onshore spending was somewhat ongoing in the US thanks to the shale revolution, very few offshore projects got approved.
This led to a mass wave of bankruptcies for the entire offshore drilling sector. Transocean was an exception. At its lowest point, when the survival of the company was in question, the stock fell to $0.67/share, or 1/253th of its peak value in 2007.
With a focus on ultra-deepwater production and newer generation drillships, Transocean has consistently managed to show among the highest day rates (the standard metric for the industry) for new contracts in 2022.
The company now has $8.5B in backlog for future work contracts, double that of the nearest competitor.
Transocean is now focused on repairing its balance sheet, as well as putting multiple drillships that were put in long-term storage (“cold stacked”) back to work. It also recently sold 2 of its oldest ships to another offshore driller.
Transocean stock is a bet on the continuous need for new oil & gas resources, and especially offshore resources, which appear to be one of the cheapest sources of new supply.
The largest risk would be a major recession or any other event sending oil into a sustained lower price range, which would crush the demand for offshore drilling. In such a scenario, Transocean could struggle to manage its still heavy debt load.
6. Texas Pacific Land Corporation (TPL)
Instead of betting on oil producers, an easier way to make money from oil is simply owning the land that contains oil. Of course, this is easier said than done and involves a good deal of luck.
This is what happened to the Texas Pacific Land Corporation. With the explosion of shale oil and especially the Permian Bassin, the land owned by TPL went from somewhat valuable to some of the most precious real estate on Earth.
And while the TPL’s current valuation certainly reflects the shale oil boom, it is not all the value of the land it owns. It can notably use this land for power generation (solar, wind, etc…), usage right (pipelines, roads), grazing, hunting, and water rights.
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The company derives most of its income from royalties on the oil produced, with 1/3 of revenues from water and other surface activities revenues.
TPL owns the land, a lot of it, and produces income with essentially no cost, no debt, and a cash balance of $511M. With an oil inventory of 14 years at a breakeven price of $40/barrel, the company should see its revenues stay stable over time and increase in case oil prices rise.
Ultimately, even if oil runs out, the company will still own a lot of land and water rights in a state that is experiencing an economic and demographic boom. This is a stock with some inherent minimum value, providing some safety no matter what, which is why it’s one of the best oil stocks out there.
Best Oil ETFs
Finding the best oil stocks can be challenging due to the unpredictable nature of the oil business, with factors like accidents, price fluctuations, and the risks of exploring new oil fields. However, the diversification offered by ETFs can be a solution, allowing investors to gain exposure to the entire sector, not just the producers.
1. Vanguard Energy ETF (VDE)
This ETF invests in all manner of fossil fuel companies, from oil & gas producers to drilling companies, storage, services, refineries, and transportation. Its top holdings are “Big Oil” companies, with Exxon, Chevron, and ConocoPhillips making up 45% of the fund’s holdings.
2. VanEck Oil Services ETF (OIH)
The service sector is the first part of the industry to boom and the first to crash, depending on oil prices and the exploration and production spending of oil producers. This makes the service sector extremely volatile. Hence, it gives it a level of leverage on the sector, allowing it to increase the portfolio exposure to oil with a smaller investment. The ETF covers all the “big names” in the oil service sector, including Halliburton, Schlumberger, Baker Hughes, and Transocean.
3. Alerian MLP ETF (AMLP)
This ETF is focused on the so-called mid-stream sector or the gas and oil pipelines that transport energy throughout the USA. This is a sector that tends to be less volatile than energy producers and also distributes generous dividends, relying on its quasi-monopoly and the high value of its transportation assets.
4. United States Oil Fund (USO)
This ETF allows exposure to the oil price itself instead of oil-related companies. It can be used to trade against the daily price movement. Considering how hard such forecasts are for short-term variations, it is nevertheless a tool best used by experienced investors.
5. VanEck Oil Refiners ETF (CRAK)
No matter the price of oil, we need refineries to turn it into a product that can be used in motors, planes, and petrochemical plants. This ETF includes major global refiners like Reliance (India), Valero (USA), Orlen (Poland), and Neste (Finland).
So if you’re betting on the continued consumption of oil, but you recognize that oil prices could fall, this ETF gives you exposure to the only segment of the industry likely to make money even if oil prices fluctuate.
Conclusion on the best oil stocks
Oil is not going anywhere, and the perception of markets in 2020-2021 that electrification had made it obsolete was very premature. Due to low capital expenditures in the 2010s, the world is actually relatively low on exploitable oil reserves.
So producers that own large deposits or have a good track record of finding new resources are likely to keep making money. This is also an industry with a history of paying high dividends and other shareholder-friendly practices, especially for some sub-segments like midstream (pipelines).
Investing in oil carries real risks, as illustrated by the near-total bankruptcy of the offshore drilling sector after persistent low oil prices for years in the mid-2010s. So it is best to take a cautious approach and to keep diversification relatively high if .
Identifying the best oil stocks is crucial, especially since oil prices and oil stocks tend to move cyclically. As a general rule, the best time to buy them is when oil prices fall and investors are dumping the sector, and the best time to sell is when prices cycle up, and conventional investors rush to buy.