Zhitong Finance learned that Bank of America Corporation recently made a bold prediction. The bank believes that the imbalance between supply and demand in the oil market will push the price of crude oil to $100 a barrel next year. The oil majors also believe that oil prices could exceed $100 a barrel as the global economy recovers amid tighter supply.

This situation will undoubtedly benefit oil stocks. Analysts in The Motley Fool, a well-known international financial media, believe that the three oil stocks, Western Oil, Marathon Oil and Devon Energy, have the greatest room to rise.

Western oil

Reuben Gregg Brewer, an analyst at The Motley Fool, said that given the trauma suffered by Western Oil during the oil market downturn in 2020, he did not consider the company to be a "buy and hold" type of energy stock. In fact, Reuben believes that Western Oil's acquisition of Anadako (Anadarko Petroleum) was not a very successful deal, which left the company ill-prepared to cope with falling oil demand and prices caused by the epidemic.

However, as oil prices rebound, which some believe is indeed likely to rise to $100 a barrel, more aggressive investors who want to invest in commodities may be interested in western oil. There are two reasons. First, as an oil company, it is clear that Western Oil will benefit from a sharp rise in oil prices. But a more important reason is that the increase in oil prices will make it easier for the company's management to cope with the continuing impact of the Anadako deal, especially as the company's balance sheet remains highly leveraged.

As a result, a rebound in oil prices will increase Western oil's profits and help improve its financial structure, a combination of which could lead to a revaluation. The wrong decision to buy Anadarko may deter conservative investors from western oil, but more aggressive investors may bet on the stock.

Marathon oil

Analyst Neha Chamaria pointed out that commodity prices not only drive the growth of Marathon oil revenue and cash flow, but also the biggest determinant of the company's capital expenditure and capital allocation plans, so the continued rise in crude oil prices is good news for Marathon Oil. Importantly, the price of crude oil has recently reached a two-year high, but Marathon's share price is still below its 2019 level.

If WTI crude averages $50 a barrel, Marathon is expected to generate $1.1 billion worth of free cash flow (FCF) this year. At a price of $60 a barrel, the company can generate up to $1.6 billion in cash flow! The price of crude oil is now more than $70 a barrel, so Marathon should be able to generate higher cash flow this year and use that extra cash to repay more debt and pay dividends.

By the end of the first quarter, Marathon had repaid $500 million in debt and plans to reduce it by another $500 million this year. The company also raised its quarterly dividend by 33% in the first quarter.

Given that with an average crude oil price of only $50 a barrel, the company will generate nearly $5 billion in free cash flow over the next five years, and the high oil price environment will lay the foundation for Marathon's steady growth in the next few years. While flexibly producing according to market conditions, the company is also tightening cost controls, and the combined production, general and management expenses this year will be nearly 30% lower than in 2019. As management gives priority to dividends and debt reduction, Marathon shareholders are expected to get higher returns as long as oil prices continue to rise.

Devon Energy

Analyst Matt DiLallo said that because of Devon's unique variable dividend framework, investors can receive dividends immediately when oil prices rise. The oil and gas producer plans to pay up to half of the excess cash generated each quarter to investors in the form of variable dividends. As oil prices rise, so does this spending.

In March, Devon paid a variable dividend for the first time based on cash flow in the fourth quarter. The company allocated 50% of the excess cash, or $0.19 a share, which is almost twice the fixed quarterly dividend of $0.11 per share. The company will pay the next variable dividend at the end of this month. Although only 48% of excess cash, or $0.23 per share, was paid in the quarter, it was 13% higher than the previous quarter and more than twice the fixed quarterly dividend. The increase in dividends is related to the rise in oil prices, which rose from $42.65 in the fourth quarter of last year to $57.87 in the first quarter of this year.

Devon's variable dividend payout should increase further as oil prices continue to rise. If the oil price does reach $100 again, Devon Energy will pay a huge variable dividend. The company's potentially huge cash dividend will attract investors.