The novel coronavirus has translated into global economic activity coming to a standstill. And with most economies likely to witness recession, the demand for energy has declined sharply. That said, it’s not surprising that energy stocks have plummeted.
Unless someone is predicting a doomsday scenario, it’s the right time to buy quality energy stocks. It makes sense to be greedy when fear is the dominant sentiment. In particular, for the broad energy industry.
To put things into perspective, the U.S. Energy Information Administration expects a 50% increase in world energy usage by 2050. That said, this growth is likely to be driven by emerging Asia.
Therefore, once the current crisis is over, energy demand will resume its long-term uptrend. Fundamentally strong stocks in the sector can therefore be considered for long-term exposure.
Considering the potential demand for oil, natural gas and renewable energy, the following stocks are attractive:
With all of that in mind, let’s take a deeper look into the key factors that make these names worth investing.
Energy Stocks to Buy: Chevron Corporation (CVX)
In the current scenario, the first point to analyse for any energy stock is the balance sheet. Chevron is among the best in the industry from that perspective. Even if oil trades at $30 per barrel through FY2021, Chevron expects net-debt-ratio to remain below 30%.
It’s worth mentioning here that Chevron has a liquidity buffer of $30 billion that includes cash, commercial paper and revolving credit facility. Therefore, the company is unlikely to face any credit stress in the coming quarters.
However, the balance sheet is not the only reason to like Chevron. The company has high quality assets that can deliver long-term value creation. As an example, the company expects free cash flow of $4 billion annually just from the Permian.
Furthermire, assets in Mexico, Gulf of Mexico and Brazil are likely to deliver sustained production growth. As a matter of fact, the company has 71bboe of 6P resources. This translates into a deep exploration and production inventory.
Overall, beyond the current crisis, Chevron stock is positioned to be a value creator. And other than stock upside, I expect robust dividends to sustain.
First Solar (FSLR)
The push for clean energy makes First Solar a stock to consider for the core portfolio. As a provider of photovoltaic solar solutions, the company’s earnings growth is likely to be robust in the coming years.
My point on the company’s growth is underscored by the fact that as of May 2020, the company’s contracted backlog was 12.3GW. As this backlog is executed, there is clear revenue and cash flow visibility. Importantly, in the last five months, the gross addition to the company’s backlog has been 1.8GW. This is a sign of strong demand for the company’s Series 6 products.
From a sustained growth perspective, First Solar has already made inroads in India. The country promises to be the largest and fastest growing market for PV solar energy. In addition, the company has presence in Europe and Middle East. So with regional diversification, the company is in a great position for growth.
Looking at the balance sheet, the key positive is that First Solar has total cash of $1.6 billion as of March 2020. With total debt of just $609 million, the company has ample financial flexibility for pursuing growth. In the coming quarters, as Series 6 manufacturing capacity is enhanced, top-line growth will accelerate.
Overall, FSLR stock is worth considering for long-term investors who are bullish on the renewable energy theme. The company’s growth is likely to be strong with continued order inflow from developed as well as emerging markets.
Exxon Mobil (XOM)
One of the key reasons to like Exxon Mobil is the fact that the company is the largest natural gas producer in the United States. On a relative basis, natural gas is a cleaner source of energy than petroleum. In the coming years, emerging Asia will drive demand for natural gas — and this makes Exxon Mobil stock attractive.
From a fundamental perspective, Exxon Mobil has $18 billion in cash and $15 billion in available credit facility. With a liquidity buffer of $33 billion, there is little reason to be concerned. It’s worth noting that Exxon Mobil recently bought 50% stake in Malaysia’s Petronas exploration block. Amidst the crisis, the company’s ability to purchase assets is an indication of the strong balance sheet.
From a growth perspective, the company’s upstream assets in the Permian and Guyana will drive cash flows in the coming years. As oil gradually trends higher, Exxon will be in a good spot to accelerate investments and production growth. With 26 million acres of exploration portfolio, I believe that 2P reserves will continue to increase.
Overall, Exxon Mobil is a quality company in the oil and natural gas business. With strong fundamentals, the company is positioned for sustained growth and this factor makes XOM stock attractive.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.