Energy stocks delivered an underwhelming performance in 2024. For example, the Energy Select Sector SPDR Fund -- which holds the energy stocks listed in the S&P 500 -- delivered a meager 2% return last year, significantly underperforming the broader market index's 23% return. Oil prices, which initially rallied but ended the year right about where they started, kept a lid on oil stocks last year.
While oil stocks performed poorly last year, they could bounce back in 2025. Devon Energy (DVN 1.59%), ConocoPhillips (COP 1.01%), and Chevron (CVX 0.78%) stand out to a few Fool.com contributors as the smartest ones to buy in the new year. Here's why they think these oil stocks could deliver standout performances in 2025.
If oil markets rebound, so will Devon Energy
Reuben Gregg Brewer (Devon Energy): Oil and natural gas are highly volatile commodities. The recent 20% jump in natural gas in a single trading session is proof of that. For most investors, playing it safe with an integrated energy major is the best bet for 2025, or any year for that matter. But if you think energy prices will rebound in 2025, well, a company focused on producing oil and natural gas will likely be the more attractive option. Devon Energy fits that bill with a U.S.-focused portfolio of oil and natural gas assets.
Devon Energy is one of the largest independent U.S. producers. Its portfolio is split roughly 50/50 between oil and natural gas (and natural gas liquids). The portfolio includes key U.S. production basins. Devon has a low break-even point of around $40 per barrel of oil. The company has roughly a decade's worth of inventory on which to drill additional wells in support of long-term growth. And it has an investment-grade-rated balance sheet. Even if energy prices fall, Devon Energy as a company is highly likely to muddle through.
But it is the upside potential that is most interesting here. That's because, as a production company, Devon is basically leveraged to rising energy prices. Plus, it just acquired production assets in the Williston Basin. That move has left the company with a leveraged balance sheet, which will be easier to address if oil prices rise. So, not only will the top and bottom lines improve if energy rallies, but so will the balance sheet. Investors will likely reward the stock very well if energy markets rebound in 2025.
An acquisition-driven boost ahead
Matt DiLallo (ConocoPhillips): ConocoPhillips closed its acquisition of Marathon Oil at the end of November. The acquisition will really move the needle for ConocoPhillips. It deepened the oil company's portfolio, adding highly complementary acreage in the lower 48 states loaded with low-cost resources (2 billion barrels with an average cost of supply below $30 a barrel).
The transaction will also be immediately accretive to its earnings, cash flow, and return of capital to shareholders. ConocoPhillips expects to capture over $1 billion in cost and capital synergies in its first year of ownership (up from its initial expectations of $500 million). As a result, the deal should supply the company with a lot of free cash flow in 2025 and beyond.
ConocoPhillips expects to return a meaningful percentage of its excess cash to shareholders in the future. It recently boosted its dividend by 34% and intends to deliver dividend growth in the top 25% of all companies in the S&P 500 going forward.
The oil producer also recently expanded its share repurchase authorization by up to $20 billion. It expects to ramp its annual repurchase rate from $5 billion to $7 billion in 2025, putting it on track to retire all the equity it issued to acquire Marathon Oil over the next two to three years.
The increase in cash flow and capital returns to shareholders could help give ConocoPhillips the fuel to outperform its rivals in the oil patch this year. That makes it look like a smart oil stock to buy in the new year.
Multiple catalysts could fuel higher returns in the future
Neha Chamaria (Chevron): With shares of Chevron ending 2024 in the red, buying the oil and gas stock now should make for a smart move. Chevron is using its strong balance sheet and steady cash-flow growth to expand its portfolio and reward shareholders, which should be reflected in its stock price in the long term.
For instance, Chevron expects to spend nearly $13 billion on its upstream business this year. Aside from the Permian Basin, the company will invest in the Gulf of Mexico and DJ Basin, where it is ramping up some deepwater growth projects. For example, Chevron expects to boost production in the Gulf of Mexico by almost 50% by 2026. In between, Chevron is confident about closing its $52 billion all-stock acquisition of Hess in the near future, having received an antitrust-review clearance from the Federal Trade Commission in September last year.
For now, Chevron expects to grow its production by a compound annual growth rate of 3% and annual free cash flow (FCF) by more than 10% on average through 2027. With Hess, it expects to grow production and FCF "faster and for longer."
In short, Chevron has strong growth catalysts, and as its cash flows grow, dividends should, too -- Chevron has increased its dividends for 37 consecutive years. With the stock yielding 4.4%, Chevron makes for a rock-solid oil stock to buy in 2025 and hold.
