Private equity flowing into oil- and gas-related investments last year drove part of my enthusiasm for the energy sector, and so far all of those investments have bit us where it counts. In the past year, oil has fallen by more than 50%, and natural gas is down about 30% from what we all thought were already low levels.
Energy exchange-traded fund Energy SPDR (XLE) is down 28% over the past 52 weeks, unleashing a world of pain on XLE investors. There is no way of knowing when pricing will get better for energy, but Josh Harris of Apollo Global Management believes pricing will get worse before it gets better:
“Certainly, at some, point prices need to go up, but I see much more opportunity than I see downsize (sic) for us in the energy space.”
David Rubenstein of Carlisle Group told CNBC something very similar last week, and like Harris, Rubenstein likes what he sees in the longer term:
“In time (oil) prices will come back, in time demand will catch up with supply, and in time I do believe that carbon-related energy will turn out to be one of the best investments in the world … I don’t want to predict any wide-scale declines in the value of all these companies but I do think there will be opportunities to buy things at lower prices.”
When two of the most successful private equity investors of all time tell us pretty much the same thing, it pays for us as individual investors to listen closely.
With that in mind, here are four energy stocks that should provide investors with both price-rebound and income potential in the coming months and years.
Big-Dividend Energy Stocks: Exxon Mobil (XOM)
XOM Dividend Yield: 3.7%
There are some solid companies that have seen their prices decimated in the last year. Exxon Mobil (XOM) is one such company.
Exxon is down more than 20% over the past year, including a few percentage points lost last week after its dreadful second-quarter earnings report.
Now, it trades at just 11 times earnings and less than twice its book value. That’s the lowest price-to-book ratio for Exxon in more than 15 years and the lowest price-to-earnings since 2012.
Exxon shares are the lowest-yielding of the four energy stocks we’re focusing on today, paying out “just” 3.7% at current prices. So XOM is a good dividend play while you wait for oil prices to move higher.
Big-Dividend Energy Stocks to Buy: Chevron (CVX)
CVX Dividend Yield: 5%
Chevron (CVX) is down over 30% in the last year, but just like Exxon, that has at least made its valuations a lot more palatable. CVX shares currently trade for just 9 times earnings and right at book value after its steep fall in the past 12 months.
And income investors will like Chevron even more than Exxon, as the former yields roughly 5% at current prices (vs. a still-good 3.7% for XOM).
CVX is being wise with its money. The continued drop in oil prompted Chevron to reduce its spending by $3 billion per year, and $2.2 billion of that reduction is realized from its lowered operating expenses. The rest of it is due to reductions on capex.
It might be a bit of a wild ride, but looking five to seven years down the road, CVX and XOM should be rewarding investments.
Big-Dividend Energy Stocks to Buy: National-Oilwell Varco (NOV)
NOV Dividend Yield: 4.5%
More adventurous investors might want to consider shares of some of the major oil services companies.
To that tune, National-Oilwell Varco (NOV) is the largest provider of drilling services equipment and operates in both the land-based and offshore drilling markets. Conditions will not improve substantially until prices firm and drilling activity picks back up, but when that does inevitably happen, there is tremendous upside in NOV stock.
National-Oilwell’s recent earnings report was just as ugly as the others coming out of the sector, with revenues and earnings drastically down year-over-year, but both figures still beat estimates.
NOV shares are down about 50% over the past year, and now trade at less than book value with a P/E of just 7.7. Like XOM and CVX, NOV appeals to income investors thanks to a current yield of 4.5%.
Big-Dividend Energy Stocks to Buy: Helmerich & Payne (HP)
NOV Dividend Yield: 4.5%
Helmerich & Payne (HP) is a contract driller that operates primarily in the United Sates, and just like every other company in energy, the near-term outlook is somewhat bleak. But when oil prices eventually rebound, the upside potential in HP stock is very high.
HP stock is down more than 40% in the past year and trades at a single-digit P/E and at just 1.2 times book value. At the current price, the stock is yielding 4.5%, so you get paid while you wait for supply and demand in energy to bounce back into balance.
I have no idea when oil prices will go higher. I am, however, pretty sure that if you adopt the private equity mindset and look out at least five to seven years, and understand that prices could go lower before they go higher, you should make an enormous amount of money from high-quality energy-related names like HP.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.