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The 5 Best Oil Stocks of 2018 (So Far)

Matthew DiLallo, The Motley Fool

Oil prices have been blistering hot so far in 2018. A barrel of WTI, which is the U.S. oil price benchmark, has rocketed 23% in the first half to more than $74, its highest level since November 2014. Meanwhile, Brent, the global oil benchmark, has been almost as hot, rising 18.8% for the year to more than $79 per barrel.

Those surging crude prices fueled big gains for the stocks of oil producers, with the following five components of the S&P 500 leading the way:

Oil Stock

YTD % Change

Type of company 

Hess (NYSE: HES)

36.7%

Oil producer

Anadarko Petroleum (NYSE: APC)

35.1%

Oil producer

ConocoPhillips (NYSE: COP)

25%

Oil producer

Marathon Oil (NYSE: MRO)

22%

Oil producer

Noble Energy (NYSE: NBL)

16.6%

Oil producer

Returns as of July 2, 2018. 

An oil pumping unit in the evening.

Image source: Getty Images.

Hess: Oil was only the tip of the iceberg

While red-hot oil prices helped fuel Hess' gains this year, it was far from the only catalyst. Hess and its partner ExxonMobil announced three more offshore discoveries near Guyana, bringing the total to eight. The partners now plan to develop three phases of that field, which could produce more than 500,000 barrels of oil per day by late 2023. In addition to that, Hess continued cleaning up its portfolio and balance sheet by selling its joint venture in the Utica Shale and paying off more debt. Meanwhile, the company has used the excess cash generated by higher oil prices to buy back stock, authorizing a $1.5 billion repurchase program, enough to retire nearly 10% of its outstanding shares. The company could expand that program even further later this year given the uptick in crude prices.  

Anadarko Petroleum: Sending back the windfall

Anadarko Petroleum is also sending more money back to shareholders thanks to higher oil prices. After initially authorizing a $2.5 billion repurchase program last fall (enough to retire 10% of its outstanding shares), the oil giant added $500 million to its buyback this year and is expected to spend the entire amount by the end of the second quarter. On top of that, Anadarko announced a fivefold increase in its dividend and committed to repaying another $1 billion in debt by the end of next year. With oil running well above Anadarko's $50-a-barrel budget level, the company should generate even more excess cash that it could send back to shareholders.

ConocoPhillips: Spreading the wealth

Higher oil prices have also given ConocoPhillips some extra money to allocate in creating value for its investors this year. Not only did the company increase its dividend by 7.5%, but it also now expects to buy back $2 billion in stock this year, which is an increase of $500 million from its initial plan. On top of that, the company expects to hit its debt reduction target more than a year ahead of schedule. Meanwhile, ConocoPhillips has also been allocating capital toward future growth by acquiring land in two emerging shale plays and buying out its partner in Alaska. These initiatives set the oil giant up for continued success in 2018 and beyond.

Several pumpjacks in a row with sunburst.

Image source: Getty Images.

Marathon Oil: Cash is beginning to pile up

Marathon Oil has spent most of 2018 finishing its portfolio cleanup plan. Not only did the company receive the final payment from last year's sale of its oil-sands position, but it also sold its Libya subsidiary. Those deals brought in $1.2 billion in cash, boosting the company's balance to a healthy $1.6 billion. That level should continue rising this year since the company can balance its budget at $50 oil, putting it on pace to generate $500 million in excess cash if crude averages $60 a barrel -- and even more at current prices. Marathon hasn't yet decided what it plans to do with the money, other than investing some of it in buying land in an emerging shale play in Louisiana, though the company said that it could start returning some of it to shareholders later this year via a stock repurchase program.

Noble Energy: Starting to unleash the gusher

Like most of the other oil producers on this list, Noble Energy put the finishing touches on its portfolio cleanup by selling several assets, including its position in the Gulf of Mexico. That gave the company the money to pay down some debt as well as repurchase shares, as it announced a $750 million buyback program. That authorization is part of a plan to return $1.3 billion in cash to investors by the end of 2020, which also includes the company's dividend. However, with Noble Energy basing that plan on $50 oil, it will likely be able to return even more cash to investors in the coming years, given where crude prices are these days.

Oil wasn't the only fuel driving these stocks higher

While the oil price rally has been a major catalyst driving up oil stocks this year, it wasn't the only factor. Another common one is that oil companies are beginning to return more cash to shareholders, primarily by repurchasing shares, which has acted like lighter fluid for oil stocks. That catalyst could continue playing a significant role this year, which is why investors should consider oil stocks that have big-time share repurchase programs underway (like this one) since they'll have more fuel to drive outperformance.

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Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.