When discussing where to put your money for retirement, there are valid arguments for and against whole sectors. For instance, financials are a poor place for retirement money, because in a financial market meltdown, these stocks are most likely to get destroyed. That was certainly true in the financial crisis, when the sector fell around 70%.
That’s why I prefer that retirement investors focus more on energy stocks. It isn’t just that the sector only fell about 30% in the financial crisis, but that over time, it has vastly outperformed financials.
Retirement investing is about primarily about preservation of capital, along with dividend payments that at least blunt the cost of inflation. Most energy stocks pay dividends, and most energy companies have been in business forever, boasting solid balance sheets and world-class management.
Yet the thing about energy stocks that gives me more confidence than any other sector is that energy is always, always in demand.
Energy: You Need It
It doesn’t matter where you live. It doesn’t matter what you do. It doesn’t matter how “green” you think you are. The truth is that everything surrounding you is somehow wound up in the DNA of petroleum.
Look around whatever room you are in right now. Chances are every single thing in that room was, at a minimum, transported from the manufacturer to the wholesaler to the retailer and to you on a fossil-fuel-burning vehicle.
Many objects around you are probably derived from petroleum. Here in my office alone, I see plastics or other petroleum-derived products that include my computer, keyboard, mouse, external DVD drive, telephone, pens, envelope stampers, chairs, paper shredder, trash bin … you get the picture. The traffic in Los Angeles alone is evidence of enormous consumption.
Energy is everywhere. It always will be everywhere, at least in our investing lifetime. It is, absent foodstuffs, the single consumable commodity that there is consistent and perpetual demand for.
That means energy stocks — broadly speaking, anyway — will always do well.
Which Energy Stocks Should You Buy?
Here are a few suggestions for must-owns within the sector.
Exxon Mobil (XOM): Of all the big oil companies, I like Exxon Mobil the best, although most members of Big Oil/Big Energy are all good choices. XOM apparently is an attractive enough investment that Warren Buffett is keeping it while selling ConocoPhilips (COP) despite the latter’s higher dividend and lower price-to-earnings ratio. The company’s balance sheet is why I love it. It only has $11.6 billion in long term debt, offset by an incredible $41 billion in cash and investments. XOM stock is always free cash flow heaven for investors. Even with its purchase of XTO Energy, last year’s FCF was $11 billion. Its 2.5% yield offsets inflation. XOM stock is a winner.
Schlumberger (SLB): On the oil-services side, I think you go with Schlumberger. I wish it paid more than 1.5% in yield, but you give that up for its projected 19% long-term EPS growth rate. That’s an amazing rate considering how long Schlumberger has been around. In fact, SLB is arguably trading at a decent price at only 18 times earnings. SLB has $12 billion in cash and investments offset by only $10.4 billion in debt, and always pumps out free cash flow.
Kinder Morgan Energy Partners LP (KMP): I also think that you want the big name in pipeline master limited partnerships (MLPs), Kinder Morgan Energy Partners LP. KMP provides the infrastructure for energy products to flow though — everything from gas, diesel and jet fuel to natural gas. It’s set up across more than 80,000 miles of pipelines (including natural gas). It even transports carbon dioxide, owns and operates seven oil fields and has loads of storage space. Best of all, with KMP being the MLP part of the Kinder Morgan structure, it pays a beautiful 7.2% yield.
BP Prudhoe Bay Royalty Trust (BPT): I also suggest exposure to revenues from direct drilling, so I think a royalty trust is a good idea. BP Prudhoe Bay Royalty Trust holds royalty interests in the Prudhoe Bay field, which contains proven reserves of 75 million barrels of oil, almost all of which are developed reserves. Royalties flow to shareholders as a 14.2% dividend. The stock is also well off its high, so it’s a good time to get in.
Williams Companies (WMB): You also want exposure to natural gas. I don’t like buying the commodity itself, but prefer an infrastructure play to reduce risk. Williams Companies is a good choice. After spinning off its drilling arm, WMB is now a pure infrastructure play. WMB has a 3.9% yield.
ETFs: Of course, you may prefer to just go with ETFs to spread your risk. In that case, you are pretty much covered by selecting PowerShares Dynamic Oil & Gas Services (PXJ), which covers infrastructure plays, and the Energy SPDR (XLE), which is a broad basket tilting more toward the actual producers and distributors of fuels.
As of this writing, Lawrence Meyers was long XOM. He is president of Asymmetrical Media Strategies, a crisis PR firm, and PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.