Oil prices bounced around quite a bit in 2024. They rallied more than 20% at one point -- topping $85 per barrel -- before cooling off toward the end of the year. Oil was recently below $70 a barrel, down more than 5% on the year.
It's anyone's guess what oil prices will do in 2025. However, three oil stocks look compelling to a few Fool.com contributors as we close out this year: TotalEnergies (TTE 0.26%), ConocoPhillips (COP 0.03%), and Devon Energy (DVN 0.29%). Here's why they believe they're the top oil stocks to buy heading into 2025.
TotalEnergies is working to shift with the world
Reuben Gregg Brewer (TotalEnergies): If you want exposure to oil but also want to hedge your bets, given the ongoing clean energy shift, examine TotalEnergies. The French integrated energy giant is the only one of its closest peers that has both made clean energy investment a goal and lived up to that goal. (Peers BP and Shell walked back their commitments.)
Through the first three quarters of 2024, adjusted operating income from the company's integrated power division (where it invests in clean energy and electricity) grew 21% compared to 2023. The division makes up around 10% of overall adjusted operating income, up from a little under 7% in the same stretch of 2023.
The 21% growth year over year is related directly to TotalEnergies' ongoing investments in the division. But there's one other notable factor to consider here: TotalEnergies' clean energy shift has been accomplished without a dividend cut. BP and Shell both used their now-rolled-back clean energy transition plans as an excuse for dividend cuts. And while ExxonMobil and Chevron both have much better dividend track records than TotalEnergies, neither has made a major commitment to clean energy.
XOM Dividend Yield data by YCharts.
Why buy now? TotalEnergies' dividend yield is an attractive 5.7%, one of the highest among its closest peers. The yield has also risen materially over the past year thanks to weakening energy markets. That's bad news, but it's also exactly when you will most likely get the most attractive price (and highest dividend yield). In fact, as 2024 draws to a close, the yield is more attractive than it has been in several years.
An acquisition-fueled uplift expected in 2025
Matt DiLallo (ConocoPhillips): ConocoPhillips closed its $22.5 billion acquisition of Marathon Oil at the end of November. The company expects that transaction to be immediately accretive to its earnings, cash flows, and return of capital per share. To that end, it recently boosted its quarterly dividend by 34%.
In addition to that immediate boost, the company initially expected to capture at least $500 million in annual cost and capital savings within the first full year following the deal. It has since boosted its synergy target to over $1 billion in the next year.
These catalysts should combine with ConocoPhillips' already strong base business to produce more free cash flow over the coming years as long as oil prices cooperate. That fuels the company's view that it can deliver dividend growth within the top 25% of companies in the S&P 500 in the coming years.
On top of that, the oil producer plans to ramp its annual share repurchase rate from $5 billion to $7 billion, with the aim of buying back over $20 billion in stock in the first three years following the deal. That has it on pace to retire all the equity issued to acquire Marathon ($17.5 billion) within two to three years of closing the deal.
That combination of cash-flow growth and rising cash returns should give ConocoPhillips the fuel to produce strong total returns in 2025. While oil prices are always a factor when investing in oil stocks, the Marathon deal added over 2 billion barrels of resources, with an average cost of supply below $30 a barrel. That positions the company to produce a lot of cash, even if oil prices fall.
The fuel to rebound in 2025
Neha Chamaria (Devon Energy): Devon Energy is one of the worst-performing large-cap oil and gas stocks of 2024. As of this writing, it's down nearly 23% this year.
Investors are miffed because Devon Energy stock gained popularity as an income stock in recent years, but its dividends are falling. Devon pays a fixed dividend, as well as a variable dividend up to 50% of the excess cash flows generated in a quarter. However, the company decided to forgo the variable dividend in its third quarter.
Instead, it repaid part of its debt and repurchased shares, as management believes Devon stock is trading at a discount after its recent fall. I don't think investors should ignore this stock, either, as the company's ongoing efforts to boost cash flows and pare debt should reflect in its share price in 2025 and beyond.
Devon Energy's debt rose after it acquired Grayson Mill Energy, but it expects to cut debt worth $2.5 billion over the next couple of years or so. Meanwhile, management is committed to paying a fixed dividend and even expects to increase it in the near term.
Devon continues to generate strong cash flows fueled by rising production and its recent acquisition. In Q3, Devon generated $786 million in free cash flow (FCF), up more than 30% sequentially. It returned nearly 55% of the FCF to shareholders in the form of dividends and share buybacks.
Given Devon's rising production backed by acquisitions and its focus on strengthening its balance sheet, the stock looks like a compelling buy now.
