The market’s steep selloff over the last two weeks is creating another entry point for long-term energy investors. Now, whether we see more of a decline or a strong short-term rebound is anyone’s guess. On Friday, March 6, oil prices fell by 10% — and they fell over 20% on Monday, March 9. Those staggering drops in oil price came as Russia rejected an OPEC deal that would stabilize prices in the the wake of the coronavirus from China. Saudi Arabia flooded the market with cheap crude in response, signaling an all-out price war.
Disciplined income investors should monitor market sentiment carefully. But in the end, focus on the long-term thesis and look at the broader trends in energy stocks.
As it stands now, the sudden drop is beating up big energy names. Yields are rising as prices fall. But chasing yield doesn’t come without risk. As a stock price falls, the paper loss increases, negating any benefit of dividend income.
So why should investors start looking intently at energy stocks? Valuations are just too low. The market is pricing in a prolonged recession. The impact of Covid-19 on the Chinese economy may not last more than one quarter.
Once factories restart, demand for energy will shoot up. So those who bought energy stocks while they were low will see the highest rewards.
With that in mind, here are seven energy stocks too beat up to ignore now.
Energy Stocks to Buy: BP (BP)
BP (NYSE:BP) stock fell to a 52-week low of $24.20 on Monday and offered up a dividend that now yields 9.9%. If the oil price war lingers, BP and its peers may have to cut dividends. But BP is writing a new story that should keep shareholders happy.
The major energy name is determined to shed itself of the company that was responsible for the 2010 Deepwater Horizon spill. So, it set a goal of becoming a net zero company in terms of carbon emissions by 2050. It also wants to cut in half the carbon intensity of all its products sold.
This green pledge may confuse BP shareholders because it operates in the oil and gas market. Yet governments around the world are slapping carbon taxes on everything. By getting in front of this trend, BP will have the cost efficiencies and infrastructure to meet its ambitious carbon reduction goals. If BP does not start this now, it could end up like coal companies.
BP posted strong fourth-quarter and full-year results. In 2019, its replacement cost profit was $10 billion. Cash flow topped $28.2 billion while dividends and share buybacks totaled $8.5 billion. Management continues to monitor the drop in oil prices and is managing the business accordingly. Its Q4 earnings are down from last year, so its lowered outlook for upstream production and capital expenditure isn’t surprising.
Below you’ll see that BP stock has favorable valuations compared to its peers:
In a 10-year discounted cash flow (DCF) revenue exit model, assume a 10% revenue drop annually until fiscal year 2030. In that scenario, BP stock is still worth $43.75.
Exxon Mobil (XOM)
Natural gas production in its upstream segment increased by 5%, driven by seasonal demand in Europe. It also expanded its agreement with FuelCell Energy (NASDAQ:FCEL) to advance large-scale carbon capture technology.
Below, you will see that Exxon’s growth score lags the S&P 500 while still leading the industry:
In 2020, as more projects come online, Exxon’s cash flow will grow. Its results will recover. It just needs better energy prices ahead.
Occidental Petroleum (OXY)
Occidental Petroleum (NYSE:OXY) is down more than 80% from its 52-week high. And this drop happened over just a handful of days.
OXY stock has a dividend nearing 10%, but shares have been falling since it reported Q4 results on Feb. 27. Occidental lost 30 cents per share on an adjusted basis. To address that, the company said its immediate concern is its Anadarko acquisition. At the time, CEO Vicki Hollub said the deal would deliver $3.5 billion in savings annually.
On its conference call, the company said it paid back 32% of the debt raised for the Anadarko acquisition. Proceeds from the divestitures and $500 million in free cash flow funded this. Furthermore, when asked about the company’s dividend, Hollub said that “we have the flexibility to first lower our growth to no growth. Beyond that, we have the flexibility to go even lower than that and still maintain our production.”
The company also positioned itself to let production fall, should the coronavirus continue hurting oil prices. And Occidental is confident that, despite the turbulence, it will hit $15 billion in divestitures.
EOG Resources (EOG)
EOG Resources (NYSE:EOG) is in the premium drilling business. Despite falling oil prices, its natural gas liquids production increased 17% and its natural gas production increased 15%. Before factoring in acquisitions, its capital expenditures came in at $6.2 billion.
And because it generated $1.9 billion in free cash flow, it allowed EOG to raise its dividend by 30% for the second consecutive year.
“The payment of a growing sustainable dividend is the best way to return cash to shareholders and is an integral part of our successful business model, high-return reinvestment,” CFO Tim Driggers said. “EOG’s dividend growth has grown at a compound annual rate of 22% over the last 20 years.”
Having never cut its dividend or issued equity to hurt its shareholders, EOG stock is hard to ignore.
Analysts are very bullish on EOG stock and have an average price target of $81.
Schlumberger (NYSE:SLB) offers a yield of nearly 7.8% as the oil price war hurts its stock price.
On March 9, one single day of trading saw shares drop 29%. Even a fourth-quarter earnings beat of 39 cents a share (non-GAAP) did not help the stock. Revenue grew 0.6% year-over-year to $8.2 billion.
The company has strength ahead. For example, its international product sales are at levels not seen since 2014. Furthermore, its mix of offshore exploration and its digital transformation helped boost results. In effect, Schlumberger is a technology firm parading as a cyclical resource company. Its Reservoir Characterization models, Wireline formation testing platform and other software solutions performed well.
If anything, with markets ignoring Schlumberger, anyone buying it now will enjoy a discount. Previously, management forecast growth in its international capital expenditure. It said that exploration and production “spending [will] grow in the mid-single-digit range.” But if the market contractions are worse than previously anticipated, the company may cut costs further.
Regardless, with revenue growth ahead and new tech offerings, SLB stock is a great name to buy.
Phillips 66 (PSX)
Among my picks so far, Phillips 66 (NYSE:PSX) offers the lowest dividend yield of 5%. This is still a good level for investors. With manageable debt at a net debt-to-capital ratio of 27% and adjusted EPS for 2019 of $8.05, PSX is a well-run company. Though cash levels fell in 2019, the drop was due to adjusted capital spending.
Margins of Phillips’ chemicals business are at a cyclical trough, but management thinks there are tailwinds ahead. Plus, the sector faces new capacity coming into the markets. That means the company will have time to improve its projects in this space.
Phillips differentiates itself from other energy companies with its strong, diversified portfolio. Its midstream business is worth $2.3 billion to $2.4 billion in earnings before interest, taxes, depreciation and amortization (EBITDA). Its marketing and specialty business also performs well.
In its chemicals business, CPChem expanded its strategic partnership with state-owned Qatar Petroleum. The unit generated $173 million in pre-tax income in Q4, which was down from the prior quarter. But I think it’s safe to say profits will recover in the long term.
Chevron (NYSE:CVX) recently posted non-GAAP earnings of $1.49 a share despite revenue falling 14.2% year-over-year to $36.4 billion. In 2019, cash flow from operations of over $27 billion suggests that the dividend is safe. Chevron also increased its dividend for the first quarter, increased its share buyback to a $5 billion a year run-rate and lowered its net debt ratio to 13%.
The company met all four of its financial priorities for the year. This list included growing its dividend, funding its capital program, keeping a strong balance sheet and returning excess cash to shareholders.
So, producing strong cash flow and paying a higher dividend while still funding projects all point to strong future growth ahead. Chevron is not sacrificing its long-term prospects to meet short-term investor expectations. Instead, it cut unnecessary costs to help it operate in an increasingly weak environment. And if energy prices turn higher, Chevron stock will move up quickly.
Even if revenue grows no more than 1% annually, Chevron has a fair value of $111.29.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris held BP stock.