With oil prices continuing to hover around new 52-week highs, increased investor interest in oil stocks and commodity-related businesses has spurred a search for value amid a sector that has seen valuations drop to lows not seen in quite some time.
With investors fearing a reversion to the mean among sectors such as technology, which have seen valuation multiples sky rocket in recent years, hedging a portfolio chock full of growth plays by sprinkling in some value is always a good idea.
In today’s rising commodity price environment, there is perhaps no better time for investors to take a deep dive into oil and gas. With many companies trading at half of their historical valuation multiples in recent years, picking up shares of solid companies that trade at a discount to historical levels is always a good idea.
Oil Stocks to Buy: Exxon Mobil Corporation (XOM)
When assessing an industry, it’s always good to start at the top and work your way down the list. For an investor looking for a company closely tethered to the price of oil, one easy way to play a sustained rebound in commodities prices would be to pick up shares of a company like Exxon Mobil Corporation (NYSE:XOM).
Exxon Mobil is a dividend investor’s dream, with one of the highest dividend yields (more than 3.6% at the time of writing) among its peers on the Dow Jones Industrial Average; the oil producer has raised its dividend for three consecutive decades, making Exxon Mobil one of the premier income-oriented value plays on the market today.
From a diversification standpoint, Exxon Mobil is an excellent way for investors to enhance exposure to global growth trends in the commodities space, given the geographic makeup of Exxon Mobil’s earnings. International upstream production has continued to allow Exxon Mobil to remain profitable in a challenging environment, and the company’s downstream operations remain an earnings machine year after year.
Oil Stocks to Buy: Phillips 66 (PSX)
Traditionally in the refining industry, Phillips 66 (NYSE:PSX) is another well-diversified option for investors seeking exposure to the oil market amid supply and demand fundamentals that are beginning to favor producers for the first time in two years.
The company’s chemicals and midstream businesses traditionally provide for approximately half of Phillips 66’s earnings, allowing the company to reinvest in margin expansion initiatives that are necessary in the current low commodities price environment.
Another excellent dividend option for investors, Phillips 66’s dividend yield of 2.8% is enticing, given the mandate Phillips 66’s management team has laid out with continuing to raise the company’s dividend year after year. Despite appreciating more than 7% thus far in 2017, indications are that this Warren Buffett-owned stock will continue to rise on improved global supply and demand conditions for oil.
Oil Stocks to Buy: Suncor Energy Inc. (SU)
Suncor Energy Inc. (NYSE:SU) is a producer of heavy oil from Canada’s oil sands, a sector that has been hit particularly hard in recent years, given the discount Canadian heavy crude demands in the market compared to the light, sweet crude produced by fracking operations in the U.S.
Suncor’s focus has remained on improving its technological extraction processes to improve the company’s bottom line in the face of break-even (or even below break-even prices) in recent years.
Suncor reported earnings at the end of October, beating analyst expectations and providing bullish forward guidance for earnings growth moving forward. The company nearly tripled its quarterly earnings on a year-over-year basis on rising oil prices and aggressive cost-cutting measures that have led to a drop in Suncor’s current oil sands cash operating cost, which hovers around $22-per-barrel, leading the sector.
With over a decade of consecutive dividend increases and a management team intent on improving margins in a low but rising commodity price environment, Suncor is an excellent way to play commodities given the innovative nature and size of Suncor relative to its peers in the oil sands space.
Chris MacDonald did not hold a position in any of the aforementioned securities.