With crude oil bouncing back, it’s time to think about buying into energy stocks again. Crude has, in fact, been one of the biggest beneficiaries of the recovery in the markets. Since the end of 2018, NYMEX crude is back up from $42 to $59. Meanwhile, international Brent crude has recovered from $50 to $67 per barrel. In any case, it’s been great news for commodity energy producers.
That said, the energy stocks aren’t exactly flying on the news. The Energy Select Sector SPDR ETF (NYSEARCA: XLE ) is up just 22% off the lows, only mildly outpacing the S&P 500 index as a whole. That means that there is a substantial opportunity to tap into the defensive and often higher-yieldings stocks in the energy sector.
Here are seven quality energy stocks to consider.
The Best Energy Stocks to Buy: ExxonMobil (XOM)
Through thick and thin, war and peace, prosperity and depression, ExxonMobil (NYSE: XOM ) has taken care of its shareholders. Exxon has paid continuous dividends dating back to 1882. It’s also a member of the exclusive Dividend Aristocrats club. Companies in this group have raised their annual dividends for at least the past 25 consecutive years. Exxon’s current streak is 36 years and counting.
Given the ongoing weakness in XOM stock over the past decade, even in the face of steadily rising dividends, the dividend yield recently hit its highest point since 1996. At Exxon’s lowest price late last year, it was offering an almost unbelievable 5% dividend yield. It’s still paying over 4% today. This is a great yield from such a high quality energy company.
As the world’s largest private operator – and with one of the world’s best balance sheets – Exxon is incredibly well-positioned to ride out storms in the energy sector. And it’s at just 14x earnings. That means that even with oil prices way down from their levels in past years this decade, the stock looks reasonably price on an earnings basis as well. Exxon won’t be the biggest winner on this list. However, it’s easily the safest and the yield is more than respectable.
Source: Steven Bratman via Flickr
Last month, we found out that Berkshire Hathaway (NYSE: BRK.B ) had taken a large position in Canadian energy firm Suncor (NYSE: SU ). Berkshire picked up a 10.8 million share block of Suncor which is currently worth nearly $400 million. Is it worth following Berkshire into Suncor?
The company may not be a household name for American investors, but it is one of Canada’s largest firms. It sports a market cap of more than $50 billion. Suncor has established itself over the past decade as the leading player in Alberta’s booming oil sands market. Between environmental issues and the perception of high costs, many investors have shied away from the oil sands stocks. But that aversion is outdated.
Canada’s liberal government has suffered falling popularity. This potentially opens the door for conservatives to retake power later this year. That would help with environmental concerns around SU stock. Meanwhile, Suncor has managed to make its operations far more efficient over the years. The oil sands are now one of the cheaper sources of oil in the Western Hemisphere, with Suncor’s costs well under C$30/barrel now.
Additionally, Suncor owns a lot of its own refining capacity. This allows it to earn far higher profit margins than other struggling western Canadian producers. Even at currently low Canadian oil prices, Suncor is trading at 16x forward earnings. Additionally, it pays a nearly 3.3% dividend. That comes along with a huge reserve life spanning decades out of its Alberta properties.
Let’s stick with Canada for the next pick. The last few years have been especially frustrating for Canadian midstream energy companies including Transcanada (NYSE: TRP ) and Enbridge (NYSE: ENB ). The liberal Trudeau government has put up roadblocks left and right to new pipelines and other energy infrastructure needed to develop Alberta’s vast oil reserves. This has led Canadian oil prices to fall to a massive discount to international oil indexes such as NYMEX and Brent crude.
The next Canadian election is set to occur in October this year. Polls are looking close as current PM Trudeau is unpopular. However, the conservative opposition, led by Andrew Scheer, is not especially popular either. Betting markets currently have the election at 60% odds on Trudeau to keep his job. That means that Scheer, while the underdog, is well within striking distance to lead conservatives back to power.
Late last year, Scheer stated that: “The reason we don’t have this energy infrastructure today, the reason why we’re bleeding in Western Canada because of this [oil] price differential, and the reason why we continue to have to import foreign oil in eastern Canada is directly related to Justin Trudeau’s policies.” Presumably, Scheer would reverse course if he wins the election.
If Scheer wins, look for Enbridge, Canada’s largest energy company and one with a more than $75 billion market cap, to be a huge winner. Regulation would lighten and Alberta would be able to start increasing oil production again. Enbridge, in turn, would have a bigger pie to profit from. As a result of years of political pressure and low oil prices, Enbridge is trading at just a 16x forward P/E ratio. Other positive traits include that it offers a 6% dividend yield, and is trading back at 2011 levels.
Source: swong95765 via Flickr (Modified)
I generally prefer ExxonMobil to Chevron (NYSE: CVX ) when comparing America’s two largest players. ExxonMobil generally has the better balance sheet, and management has a fine track record of capital management over the years. And at the moment, along with Exxon’s standout balance sheet, it also offers a higher dividend yield.
But Chevron is a solid energy stock choice at this time as well. The market has been giving Chevron stock more credit than Exxon recently. You can make a good case for CVX stock. Whereas ExxonMobil hasn’t shown a great deal of growth lately, Chevron has had more irons in the fire. Despite the low oil price environment, these growth projects have allowed Chevron to deliver far more free cash flow growth in recent years.
With huge expansion going on in both the Permian and in overseas LNG operations, Chevron should be able to deliver more cash flow growth in coming quarters. That, in turn, should fund both the company’s share buyback and further dividend increases. In picking between XOM and CVX stock, even if you choose wrongly, you’re still likely to end up satisfied over the long haul.
Of the integrated major oil companies, BP (NYSE: BP ) is arguably the most attractive of the whole lot. BP’s reputation may still be dinged up in some quarters due to the Deepwater Horizon tragedy. But its effect on the company is almost gone, BP is just about finished with paying off the damages relating to that disaster.
Meanwhile, BP has grown revenues, earnings and cash flow steadily over the past three years. Perhaps most importantly, BP has been able to steadily increase its operating cash flow despite high volatility in oil prices over that timespan. BP’s strongly performing downstream operations help to shelter it from oil price volatility.
Several years ago, many analysts considered it a foregone conclusion that BP would be forced to cut its dividend. Instead, BP was able to hold the line, and is now actually growing the dividend again, albeit slowly. That said, BP stock already yields 5.7%, so investors are getting paid plenty to hold their shares. And at a less than 11x forward P/E ratio, BP is also one of the cheapest oil companies around on an earnings basis.
Source: Mike Mozart via Flickr
First things first, refining stocks tend to be inferior long-term performers to integrated oil companies. They tend to be more volatile, as they are highly reliant on swings of various oil and gas products in relation to each other, as opposed to the price of oil itself. In this decade, U.S. refiners have enjoyed an unusually robust market for their end products. That has led to an unusually high period of profitability that is unlikely to continue indefinitely.
That said, as a short-term trade in coming weeks or months, there’s a lot to like about Valero (NYSE: VLO ). The dominant refining firm saw shares tank from $120 to $70 between October and year-end, and have only bounced to $84 now. Valero’s drop wasn’t just due to market instability. Their key metric, the crack spread, also collapsed to 10-year lows. The crack spread measures how much profit refiners get turning commodity crude oil into a ratio of gasoline and heating oil.
In any case, a director of Valero stepped up with a massive 25,000 share insider buy as the stock hit its lows, nearly doubling his position in the firm. That’s a nice vote of confidence in turbulent markets. Meanwhile, the crack spread has recovered from its winter dive, more than doubling to return to more normal (and profitable for Valero) levels.
Analysts see VLO stock trading at just 8x forward earnings, and it also pays out a 4.3% dividend. This isn’t the sort of stock you probably want as a long-term investment, but it looks ripe for a profitable trade as it catches up with the rest of the market to the upside.
San Juan Basin Royalty Trust (SJT)
For a much-smaller-cap name with a different risk/reward profile, let’s take a look at San Juan Basin Royalty Trust (NYSE: SJT ). San Juan is a trust, not an operating energy company. The trust receives a revenue share on all the oil and natural gas produced out of its land package in New Mexico. At this juncture, the field produces essentially all its revenues from natural gas.
The huge plunge in natural gas prices from as high as $15 a few years ago to just $3 now has slashed the value of SJT stock as well. This could be a great opportunity for long-term investors to load up, however. San Juan’s production comes from long-life wells, unlike the more recent fracking wells that have huge production declines after they go into production. In practice, that means that San Juan’s field should keep producing even after many of the newer frackers fade away.
The operator of San Juan’s field (remember, San Juan Trust just takes a cut of profits, it has no employees or corporate operations) recently sold the field to a more aggressive operator that will put more wells into operation. This should lead to a substantial rise in production from the Trust’s land, leading to higher dividends going forward. San Juan pays a monthly dividend, currently in the 9% annual yield range. The trust has sizable leverage to the price of natural gas. Should natural gas pop due to weather or other catalysts, SJT stock could double again rather quickly. For now, its owners can enjoy a huge dividend yield from a trust that operates with much less risk than a usual small E&P company.
At the time of this writing, Ian Bezek owned XOM, BP, BRK.B, TRP, ENB, and SJT stock. You can reach him on Twitter at @irbezek.
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