2 No-Brainer Oil Stocks to Buy With $200 Right Now
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Oil markets have been very volatile in recent years. In 2020, the price per barrel fell below $25, only to zoom past the $100 market two years later. Today, oil prices are hovering around $70 per barrel. If you're looking for oil stocks that can thrive in varying conditions, the two companies below are for you.
Trust in superior capital allocation
Capital allocation in the oil space can be difficult because a company's survival is often prioritized over shareholder profits. For instance, a company might get lucky on a particular reservoir and generate hundreds of millions of dollars in free cash flow over the well's lifespan. While the best thing to do might be to send this free cash flow back to investors, management often gets involved in empire-building. That is, they acquire all sorts of additional assets that may not have the same return profile as the original well -- potentially squandering the original golden goose.
All this is to say that capital allocation is key when it comes to identifying profitable oil stocks. How can we tell how good a company has done at investing shareholder wealth? Return on equity (ROE) gives us an idea of how much a company earns for shareholders, while return on invested capital (ROIC) captures value creation for debt and equity holders. On this front, Chevron (NYSE: CVX) -- one of the world's most recognizable oil brands -- comes out looking pretty good, with long-term ROE and ROIC averages in the double digits.
It hasn't always been a smooth ride. Even Chevron has struggled to maintain its average return profile during recent volatility. But as the past year or two has proven, Chevron has the financial might and long-term vision to bounce back from operational challenges. And it's not like the stock is overly expensive. Shares trade at just 15 times earnings -- roughly half the market average -- and sport a free cash flow yield above 6%.
It's not the flashiest pick, but there's a reason Chevron shares have attracted the eye of Warren Buffett, who owns around 6.5% of the company. Buffett likes companies that put shareholder interests first. And while it hasn't always been perfect, Chevron has a multidecade track record of success.
Get more growth with this oil stock
Warren Buffett isn't only a fan of Chevron's capital allocation. He also loves Occidental Petroleum's (NYSE: OXY) CEO, Vicki Hollub, who he believes is "running the company the right way." By that, he likely means she's prioritizing profits over production -- which, as mentioned, can be difficult to accomplish when it comes to capital allocation.