After years of oversupply, oil prices are still only trending slightly upwards. Although the peak oil prices of 2012-2014 are unlikely to return this year, investors should not be too quick to dismiss the sector. New tensions between the U.S. and Iran, following the killing of Maj. Gen. Qasem Soleimani, might trigger a resurgence in oil prices.
A renewed boom in the oil markets requires two things to happen. First, oil prices must firm up and rise throughout 2020. Destabilization in the Middle East might speed up the rise in oil prices. Unfortunately, this will hurt other spaces like airlines, automobile manufacturing and consumer discretionary. Rising energy prices increase costs for such goods and would put pressure on demand.
Second, OPEC must maintain or further lower output to keep energy prices high. So far, the Gulf Nations are keeping output constrained and are even cutting deliveries further.
To manage your portfolio’s returns effectively, you will need to consider increasing your weighting in energy to offset a drop in the other sectors. With that said, here are seven energy stocks you should buy in light of a resurgence of the oil boom.
Energy Stocks to Buy: BP (BP)
Stuck in a trading range for months, BP plc (NYSE:BP) is an integrated oil and gas firm that steadily shed assets after the Gulf of Mexico spill in 2010. At these levels, the stock is a good income play for conservative investors and for those looking for steady retirement income.
BP modeled oil prices to fall to the $40 – $50 range in the near-term. But because prices are now at the $60 level, investors should expect the company to bounce back sharply from its extremely weak third-quarter report. BP reported replacement cost profit falling year over year due to “lower liquids and gas realizations.” Poor weather conditions hurt results too.
Despite its weak quarter, BP continued to apply its underlying cash flow to buy back stock, pay a quarterly dividend and to cover its capex spend. Record results at its Whiting and Cherry Point refineries, plus expansion in the Spanish power market, suggest growth from diversified sources. This lowers BP’s reliance on an oil price rebound.
Investors may consider Q4 another headwind as it books costs. And since the market is forward-looking, the seasonal maintenance costs and turnaround activities for upstream will follow-up with revenue growth ahead. Similarly, BP’s lower industry refining margins for downstream will reverse, too.
Exxon Mobil (XOM)
Similar to BP, Exxon Mobil (NYSE:XOM) is stuck in a narrow trading range at around $70. The company’s asset sale improves its balance sheet, but higher oil prices will push profits to better levels.
Exxon’s asset sale from Norway will raise $3.6 billion, offsetting weak performance for its refining and chemicals business. Oil production levels are still unchanged from the last quarter. Still, Q3 results are steady and have room to grow now that energy market prospects are improving.
Exxon reported earnings of $3.2 billion. Cash flow jumped sharply from $6 billion in Q2 to $9.5 billion from Q3, due mostly to asset sales. Upstream global gas realizations are still a challenge, but growth in the Permian will help production. Investors should not expect Upstream rebounding by much, but the higher oil prices should still offset its underperformance.
Income investors should praise Exxon management’s commitment to the dividend. The company raised the dividend by 6%, marking the 37th consecutive year of dividend growth. Management said about the raise: “The strength of our balance sheet provides us with the capacity to invest through the cycle with leverage at just 12%.”
Ongoing commitments to projects like the one in Tengiz, despite the high costs, is still of strategic importance for Exxon’s long-term growth. But if Exxon leverages its scale and manages cost pressures, the project will add meaning to profits in the future.
Despite a big write-down, Chevron (NYSE:CVX) stock is holding up. Markets are betting that the $10-$11 billion write-down is a one-time event that sets the bottom to Chevron’s near-term costs. More than half of the write-down is related to the Appalachia shale unit. But by holding the $20 billion worth of organic capital spending levels, the company will benefit from a return on capital as the market improves.
Chevron will take a disciplined cost control approach with gas-related opportunities. It said it “will reduce funding to various gas-related opportunities including Appalachia shale, Kitimat LNG, and other international projects.”
CVX stock trades at a price-to-earnings ratio of 17, which reflects investor appreciation over management’s candidness. But the honest commentary posted on the Dec. 10 press release happened when oil prices were still moving sideways. Now that the commodity is firming up, Chevron has a good chance of finding success as competitors with a weaker balance sheet flounder.
Chevron has $2.8 billion budgeted for capital spending related to its downstream business. $1.6 billion will be spent on U.S downstream while international downstream will be $1.2 billion.
Improving oil prices should give both the downstream and upstream markets a positive lift. The average price target on CVX stock is $138.88. Investors who forecast no revenue growth ahead in the next 10 years will arrive at an even higher price target (from a finbox.io model) than analysts.
ConocoPhillips (NYSE:COP) pays investors a modest dividend in the 2.5% range and erased most of 2019’s lows. Even after the strong performance on the market, the stock still trades in the sub-10 P/E multiple.
At an analyst and investor meeting in November 2019, the company highlighted the 2012-14 oil price highs at $100 per barrel. It noted the energy sector’s weighting on in the S&P 500 fell from 12% to 4%. Despite the weakened importance of energy, ConocoPhillips believes it is resilient to the falling energy market. It allocates capital responsibly by measuring its return.
The company posted 2019 full-year free cash flow (FCF) yield topping 9%. This had assumed oil would be at the consensus $57 per barrel. But low stock valuations and a higher return on capital at low oil prices suggest the stock will reward investors in 2020.
COP noted the 12% return on capital for the full year is a strong turnaround from the negative 4% in 2016. Further, it forecast:
“The improvements across all these metrics set the stage for the 10-year plan you’ll see today. We are stronger now than we were three years ago and we plan to get stronger over the next decade and will keep our focus on these drivers of value.”
Investors could ignore the unlikely scenario where the company does not grow in the next few years. In a dividend discount model with stable growth, COP stock is worth over $73 a share.
Royal Dutch Shell (RDS.A) (RDS.B)
With a dividend that yields over 6%, Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) will appeal to both income investors and energy investors. In the third quarter, the company, best known for its “Shell” gas stations, posted strong cash flow generation. The Integrated Gas and Oil Products division contributed to the $12.1 billion in operations and free cash flow of $10.1 billion. Earnings of $4.8 billion were hurt by lower prices and margins. And although strong trading ahead will lift results, higher energy prices will help revenue grow faster than previously expected.
Integrated gas added $2.7 billion in Royal Dutch’s $4.8 billion in earnings. Downstream added $2.2 billion in earnings.
RDS will still grow its business even if the energy resurgence plays out slower than expected. When speaking about the liquefied natural gas market, the company said: “Not only do we expect growing demand, [but] we also see a supply gap emerging in the mid-2020s, once the current wave of new liquefaction capacity has been absorbed. Consequently, we are seeing continued interest in long-term contracts from LNG buyers.”
It already established its market in Hong Kong after it signed long-term agreements from LNG buyers. As its LNG terminal services the Asian market, Royal Dutch may grow its cash flow and increase returns from a market outside of oil.
LNG contracting will give the company a predictable revenue stream. Long-term contracts provide price stability. And for 2020, its price review has no changes. In fact, Royal Dutch already expects positive price changes and has its outlook ready for 2025.
Even after a steady uptrend, Enbridge (NYSE:ENB) shares still pay a generous dividend. In fact, the company recently raised its dividend by 9.8% on Dec. 10. This boring pipeline company is a solid, long-term holding that investors should consider holding.
Even though higher oil prices will not directly help Enbridge, the resurgence in the sector will give investors a reason to hold ENB stock. The company has resilient energy infrastructure in liquid pipelines, gas transmission and gas distribution in storage. Growing global demand for energy is undeniable. By 2040, demand will increase 24% from 2018 levels. According to ENB, this demand stems from world population growth of 27%, urbanization increasing 16% and the global middle class increasing 67%.
Enbridge forecasts discounted cash flow per share of $4.50 – $4.80 in the full-year 2020. And beyond 2020, DCF/share growth will be in the range of 5% – 7%. The company’s priority on improving its balance sheet will lower risks for shareholders. Enbridge is aiming to have a Debt/EBITDA ratio at 4.5 times to below 5 times. Add the $6.5 billion in dividend payments in 2020 and organic growth and income investors will continue accumulating the stock.
Halliburton Company (HAL)
Halliburton’s (NYSE:HAL) revenue decline may end as the resurgence in oil begins. In the third quarter, revenue fell 6% to $5.6 billion, while earnings fell 3% to $536 million. Still, investors may anticipate international market strength continuing and a rebound in its North American business in 2020.
Uncertainties in the period hurt supply and demand, led by Iran sanctions and production falling in Venezuela. Supply constraints, due to political instability in Africa and Latin America hurt Q3 results. But the Phase 1 U.S. and China trade deal should drive energy demand higher. Plus, Halliburton’s drilling and exploration business will have a strong return if the long-term global demand for energy trends higher.
On its conference call, the company said: “Our Drilling and Evaluation division traditionally had the most exposure to international markets, with about 70% of division revenues coming from outside North America.”
The industry is maximizing returns from mature fields. And as drilling activity expands, Halliburton has strong growth potential ahead, regardless of the surge in energy prices. The company’s 2020 outlook is bright. International topline and margin growth opportunities will increase. With a global slowdown unlikely, HAL stock will likely continue its uptrend that started in the last few months.
As of this writing, Chis Lau owned shares of BP.