4 stocks for oil’s final bull market

As oil prices continue to rise, many U.S. shale stocks will do very well again. Some already have largely priced in the scenario I have described.

Investing in the right U.S. oil stocks, in my opinion, will make investors market-beating returns for at least the next several years. There are many companies with massive debts and noncore shale-play assets that are still in trouble, though. Investors still need to avoid those because even with higher oil prices, they might not have enough time to heal themselves.

Among oil stock winners will be those with lower debt, have assets in the cores of the best shale plays, aren’t already fully valued and have a viable transition strategy to natural gas (which will have high demand for several extra decades than oil). Here are four companies that I own that are still priced to buy:

Chesapeake Energy

I have owned and traded Chesapeake CHK, -1.40% for years. This company is actually the least levered to oil in this group. Only about one-third of its production is oil, while two-thirds is natural gas. The company has aggressively restructured and sold off assets to overcome bankruptcy risk. It will either develop its Oklahoma SCOOP/STACK play or pull the money forward with a sale. That asset alone is probably worth about $1 billion.

Ultimately, I believe the company will be a low-debt natural gas play in about three or four years. After recent asset sales it is likely the third-largest natural gas producer in America.

Conoco Phillips

This company COP, -0.89% used to be much larger but has downsized and positioned itself for the intermediate term. It has sold assets, plans to sell substantially more (likely overseas) and is focused on having a strong balance sheet. Its debt obligations are flexible and decreasing.

Conoco has shifted to short-cycle unconventional drilling that alleviates long-term risks from the “end of oil.” It has ended all deep-water exploration — executives understand OPEC's threat. Management has positioned the company to succeed with $40-$60 oil. It will do much better in a higher-priced environment. With an oil price of $50, the company can fund capex out of cash flow, maintain its dividend and engage in stock buybacks.

It is the seventh-largest natural-gas producer in the U.S.

Encana

This company ECA, +0.33% has dramatically refocused itself the past few years. Its “core four” strategy has reduced its footprint to four main oil and gas fields. The key field now is the Permian, where it has thousands of low-cost drill sites. It has two very good natural-gas plays for the future. Its debt is much lower than a few years ago, and it is nearly covering production costs out of cash flow.

With higher oil prices, Encana will not only more than cover its capex and debt, but will throw off cash in the next few years. I believe this stock is deeply undervalued.

Occidental Petroleum

Occidental OXY, -0.21% has a very good balance sheet. Its debt-to-market-cap ratio stands at about 24%. About 60% of its production is from liquids. It pays a dividend of more than 4% at recent share prices.

The company is the largest producer in the Permian basin, which gives it a tremendous leg up on most competitors. Another strength is a strong chemical division that throws off cash. It also has midstream assets that can be sold for cash or spun into an MLP. The company's financial flexibility is impressive. Watch to see if it acquires more oil and gas assets, or looks to maximize profits intermediate term. The second option is a better path for investors.

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