A consolidation wave has washed over the oil patch this year. Several oil companies secured needle-moving acquisitions, including ConocoPhillips (NYSE: COP) and Devon Energy (NYSE: DVN).
Those two oil companies recently closed their deals. That should give them a lot of fuel to grow shareholder value in 2025 and beyond. Those catalysts make them look like great oil stocks to buy as we head into the new year.
Double the expected benefit in 2025
ConocoPhillips completed its acquisition of Marathon Oil in late November. The all-stock deal valued its rival at $22.5 billion, including the assumption of debt ($5.4 billion).
"This acquisition of Marathon Oil is a perfect fit for ConocoPhillips," stated CEO Ryan Lance in the press release announcing the deal's completion. He noted, "Marathon Oil adds high-quality, low cost of supply inventory adjacent to our leading U.S. unconventional position." Overall, the company added over 2 billion barrels of resources at an estimated cost of supply below $30 per barrel.
ConocoPhillips expects the deal to be immediately accretive to its earnings, free cash flow, and return of capital per share. On top of that, the company anticipates capturing significant synergies. It initially expected to capture $500 million in cost and capital synergies during its first full year of ownership. It now predicts that number to be in excess of $1 billion over the next 12 months.
That helps drive the company's view that it can return a lot more cash to shareholders in the future. ConocoPhillips has already increased its dividend by 34%. Meanwhile, it expects to deliver dividend growth in the top 25% of companies in the S&P 500 in the future. The company also plans to ramp its share-repurchase pace from $5 billion annually to $7 billion. It expects to buy back over $20 billion in stock over the next three years, which would allow it to retire the equivalent amount of equity it issued to close the deal within two to three years.
The combination of growing earnings, free cash flow, and capital returns could give ConocoPhillips the fuel to produce robust total returns in 2025 and beyond as long as oil prices cooperate.
Going on an acquisition-fueled buyback binge in 2025
Devon Energy closed its purchase of Grayson Mill Energy in late September. The oil company paid $5 billion in cash and stock.
The deal significantly enhanced the company's position in the Williston Basin. It added 307,000 acres and 100,000 barrels of oil equivalent (BOE) per day of production, boosting its regional position to 430,000 acres and 150,000 BOE per day of output. That added scale will make Devon the third-largest onshore pure play producer in the U.S.
The acquisition is also highly accretive, boosting its earnings and free cash flow per share. It expects the enhanced scale to enable it to realize $50 million in annual cash-flow savings. Meanwhile, Grayson Mills owns midstream infrastructure that will help boost margins by $125 million.
These factors drive Devon's view that it will produce a lot more free cash flow in 2025 and beyond. That led the company to increase its share-repurchase authorization by 67% to $5 billion through mid-2026. It also expects the deal to be accretive to its dividend payment in 2025 and future years. In addition, Devon plans to use some of its excess free cash flow to strengthen its already strong balance sheet, aiming to reduce debt by $2.5 billion over the next two years.
This combination of growth and increased cash returns should give Devon the fuel to produce strong total returns in 2025 if oil prices remain relatively stable.
Acquisition-fueled growth ahead in 2025
ConocoPhillips and Devon Energy have a lot of momentum heading into 2025 after closing their needle-moving acquisitions. Those deals will be immediately accretive while providing meaningful deal synergies over the next year. That will give both companies more cash to return to shareholders, which could help provide them with the fuel to produce high-octane total returns. That compelling return potential makes them look like great buys heading into 2025.
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Matt DiLallo has positions in ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
