One Of My Favorite Energy Stocks Is Still A “Buy”…

In case you missed it, oil prices have rallied to seven-year highs. Benchmark West Texas Intermediate (WTI) crude topped $77 per barrel recently, a level unseen since 2014.

That’s a long way back from April 2020, when global demand dried up and prices briefly dipped below zero.

Suddenly, analysts are now expecting crude to spike to $80 per barrel this summer.

If you missed out on the rally, that’s too bad. As I suspected back then, it turned out to be an historic buying opportunity for the energy space.

Over at High-Yield Investing, my subscribers and I took full advantage by buying everything from midstream pipeline outfits to pure-play drilling operators.

But the good news is that there’s still a chance to earn solid income and make nice gains in this space, especially if oil continues to rally. So if you’re late to the party, I’ll make a suggestion…

Take a look at ConocoPhillips (NYSE: COP). Here’s why…

One Of My Favorite Energy Stocks

ConocoPhillips brings over a million barrels of oil to the surface per day (with 4.5 billion waiting in reserve).

I’ll let you do the math.

With productive wells from Alaska to Malaysia, ConocoPhillips’ daily production volumes have climbed 16% from a year ago. Combine that with stronger prices, and adjusted earnings soared nearly 90% last quarter to $902 million. Adjusted operating cash flows for the period came in just north of $3 billion – or $33 million per day.

By any standard, that was a good haul. And oil has continued to strengthen since then. The question is, will those profits evaporate if crude prices plunge?

Decline? Yes. Evaporate? No.

Management just issued a long-term projection for the next decade. I’ll skip ahead right to the good part. Assuming a conservative price of $50 per barrel, the company will generate $145 billion in cumulative operating cash flows over the next ten years. And that’s based on an average oil price about 30% below the current going rate.

Obviously, this outlook will sweeten considerably if oil remains at these elevated levels. In fact, every $10 uptick in average prices will translate into an extra $30 billion of incremental operating cash flow. But let’s just stick with the $50 per barrel baseline.

At that rate, the company will gush an average of $14.5 billion per year over the forecast period.

About half of that colossal sum will be needed for capital expenditures. Management also expects to lighten the balance sheet by eliminating $5 billion in debt over the next five years. But most of the rest will be diligently returned to stockholders.

The company aims to return 30 cents on the dollar via dividends and stock buybacks. Of course, anybody can make idle promises. Talk is cheap. But COP has delivered — over-delivered, actually. Since 2016, it has exceeded targets and returned 43% of its operating cash flows.

In the meantime, the acquisition of Concho Resources continues to bear synergistic fruit. That merger is now expected to yield $1 billion in yearly cost savings. COP is also about to start unwinding its 10% ownership stake in Cenovus Energy (NYSE: CVE), plowing all of the proceeds into continued share repurchases.

Bringing It All Together

Between dividends and buybacks, this cash machine intends to return $6 billion to investors in 2021 – for a “total yield” of 7.5% on the $79 billion market cap.

About five years ago, COP made a strategic pivot away from growth in order to optimize returns on capital. And remarkably, it only needs to deliver a modest 3% annual increase in production to achieve these ambitious cash flow targets.

Nor does the company require lofty prices to thrive. By targeting low-cost supplies, the highly efficient organization can prosper even with oil below $40 per barrel. It could meet all spending needs internally at that level and still afford to dish out $24 billion in dividend payments over the next ten years.

Just think what it can do at $77. Or $80.

Not surprisingly, this upbeat outlook has triggered a slew of bullish analyst upgrades and upwardly revised price targets in recent days. And while the yield isn’t as high as it was when we added it back in March, COP still offers a market-beating yield today.

Even though we’re sitting on a gain of 115% over at High-Yield Investing, I continue to rate COP a “Buy” for investors right now.

Editor’s Note: As good as COP is, there’s a group of 5 safe, high-yield stocks that I like even better…

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