CNBC’s Jim Cramer presented his favorite oil stocks on Thursday, suggesting that a more disciplined approach to capital spending has hit the industry and allows stocks to continue to rally.
“Now that the oil industry has learned some discipline, I think prices could stay high for a long time, which means that the recovery in oil stocks is probably – although it has been incredible this year – far from finished, “said the” Mad Money “the host said.
Cramer turned against investing in oil stocks in early 2020, believing it was getting harder and harder to make money. However, Cramer said Thursday that a “new momentum” is hitting the energy sector, with companies less willing to add drilling capacity as oil prices rise. This restriction helps keep oil prices at levels where companies can make more money, he said.
“In that case… you should be ready to own some of the newly disciplined oil producers,” he said.
Here are his favorites:
A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.
Nick Oxford | Reuters
Cramer said he liked Devon Energy’s variable dividend, which allows investors to receive a share of the company’s profits instead of just a fixed payout amount. “Rather than borrow money to drill like crazy when business is booming, [CEO Rick Muncrief] wants to reward shareholders, ”Cramer said.
While the stock is up 107% so far this year, Cramer said he continues to “love it here because, based on how they calculate the variable dividend, it turns out. be one of the best returns on the S&P 500 ”.
Pioneer of natural resources
Shortly after Devon unveiled its variable dividend, Pioneer Natural Resources followed suit, Cramer said. It wasn’t due to start until next year, but in August the company moved the schedule forward to start making payments almost immediately, he said.
“Based on what they paid last quarter, the stock has a 5.2% return, although it is expected to be higher than based on the company’s cash flow estimates for the next five years. “said Cramer. “In addition, Pioneer has great strengths in the Permian Basin that are worth much more as long as the industry remains disciplined in production.”
Previously “one of the most aggressive drillers in the business,” Cramer said Diamondback Energy is now placing more emphasis on returning capital to shareholders. For now, it is doing so through a $ 2 billion buyout initiative due to where the stock is trading, Cramer said.
“Once it gets high enough, management says it will roll out a variable dividend instead. Since then this thing has been on fire, but I bet it has more room to run,” Cramer said. .
For investors who think the aforementioned exploration and production companies are “too risky,” Cramer said Chevron was his favorite among integrated oil companies.
“Not only are these guys disciplined on production, they also have a religion on climate change, spending $ 10 billion – up from $ 3 billion – to find ways to cut carbon emissions,” Cramer said. , noting that he had discussed the plan with CEO Mike Wirth. on “Mad Money” last week.
“I think it’s a better use of their money than leasing more oil rigs. Plus, in the meantime, Chevron is paying you to wait with its plentiful and safe 5.4% return,” Cramer said. .
Cramer said these “smaller special situations” might be worth considering for some investors:
- Denbury Resources: After declaring bankruptcy last year, Cramer said the company “has since grown into a major player in carbon capture and storage – exactly the sort of thing Chevron is spending a fortune on.”
- Tellurian: The company is focusing on liquefied natural gas, including developing the terminals needed to ship the producer overseas where it is more expensive, Cramer said.
- ConocoPhillips: Cramer said ConocoPhillips is a well-run company that is likely to better manage the Texas oil assets it recently acquired from Royal Dutch Shell. “They just increased the dividend. You get almost 3% [yield],” he added.