Since the dizzying lows of March, the broader markets and most stocks have been going up to hit new highs nearly every week. Amid all of this positive momentum,investors are wondering if there are any energy stocks worth buying for long-term portfolios. After all, it’s hard not to feel uneasy about such an unflagging rally.
For most energy firms, first-quarter results reflected lower demand due to COVID-19, as well as an OPEC price war that caused havoc, particularly in March. And Q2 results aren’t likely to look any prettier.
Lately energy stocks have been recovering as the price of oil rises from the lows seen in April to close to $40. Put another way, most market participants believe that the lows seen in energy stocks earlier in the year reflected most of the potential bad news for the immediate future.
On March 18, the Energy Select Sector SPDR ETF (NYSEARCA:XLE) hit a 52-week low of $22.88. Now it is around $41.20. If you were brave enough to invest $1,000 in the ETF three months ago, you’d now have about $1,800. Despite the eye-popping rate of return in such a short time, XLE is still down over 30% year-to-date (YTD).
According to Charles Olson, professor at the University of Maryland’s Robert H. Smith School of Business, “Three types of companies can succeed in this market. The easiest-identifiable type is a large, well-capitalized and low-debt company integrated in all aspects of the oil business. This includes exploration, development, production, refining, distribution and marketing.”
Professor Olson’s first example would be Chevron (NYSE:CVX):
“Such vertical integration means when the price of crude oil drops and stays low, it costs less for such a company — like Chevron as a good example — to use crude oil in their refineries that produce the likes of gasoline, jet fuel and diesel fuel. Chevron has incredibly deep pockets. It’s very, very large and has lots of cash. And they can wait while the market is down until it recovers, because they’ll outlast their competitors. Supply will go away as prices are going back up.”
His other examples are ConocoPhillips (NYSE:COP) and Phillips 66 (NYSE:PSX). According to Professor Olson:
“A second type is the pure production company — like ConocoPhillips, which is poised to continue operating profitably. This company is well-capitalized, with lots of money and resources and doesn’t carry much debt. These qualities have it poised to outlast a bad market – whether a few weeks, a few months or a few years. The third type of company here represents moving from upstream (where crude oil is developed and produced) to downstream (where oil is refined and marketed). Phillips66 represents the latter, as a company that’s well-capitalized with lots of cash and very little debt and positioned as a very efficient refiner.”
With that background information in mind, here are three energy stocks to buy for long-term portfolios:
These energy companies are poised for long-term gains.
Energy Stocks to Buy: Exxon Mobil (XOM)
As the largest publicly traded oil company in the U.S., Exxon Mobil needs little introduction. It is the world’s third-largest producer after Royal Dutch Shell (NYSE:RDS.B, NYSE:RDS.A) and BP (NYSE:BP).
Exxon Mobil is the largest natural gas producer in the U.S. That leadership puts the company on the radar for investors looking for clean energy companies. In fact, during the most recent shareholder meeting, management emphasized the group’s commitment to advance lower-emissions technologies, including carbon capture.
In early May, the oil major released Q1 results. Quarterly losses came in at $610 million, compared with earnings of $2.4 billion a year earlier. This was the first quarterly earnings loss in more than 30 years.
The group reports revenue in three main segments:
- Upstream (suffered from weak prices in crude and natural gas);
- Downstream (decreased demand for jet fuel and gasoline affected the results negatively); and
- Chemical.
In response to market conditions, the group said it would be reducing its 2020 capital spending by 30% and lowering its cash operating expenses by 15%.
Overall, management seems confident that things will likely get better over the remainder of the year. In the coming months, management may also be able to acquire some reasonably-priced assets of value that may currently be in financial distress.
Exxon’s board has decided to keep the dividend intact, at least for now. Thus the juicy dividend yield stands at 7.2%. As long as the group can maintain its “Dividend Aristocrat” status, investors will likely stick with XOM stock.
On March 23, XOM stock hit a 52-week low of $30.11. So far in 2020, shares are still down over 30%. Any potential pullback in price in the coming days would make Exxon Mobil one of the best energy stocks to buy on the market.
Kinder Morgan (KMI)
The second company on my list is Kinder Morgan, one of the largest energy infrastructure companies in North America. As a midstream oil and gas company, it operates approximately 83,000 miles of pipelines and 147 terminals.
Those operations transport about 40% of U.S. natural gas, both for domestic usage and exports. Its terminals store and handle petroleum products, chemicals and other products.
The group’s Q1 results, reported in late April, were in line with analysts’ estimates. EPS came to 24 cents per share, just slightly down from 25 cents per share a year ago. Kinder Morgan posted revenues of $3.11 billion for the quarter ended March 2020.
Although crude oil took a large hit over the COVID-19 shutdown, natural gas transportation and storage were still in demand. And the midstream company has now reduced 2020 capital expenditures by about 30% to $700 million.
Energy infrastructure companies are an essential part of our economy. Kinder Morgan’s business model ensures that KMI’s customers pay the group the negotiated rate regardless of the amount of fuels that KMI pipelines carry. That’s a huge boon to revenue stability.
In recent quarters, management has also paid off a significant amount of debt, a fact that has strengthened the balance sheet. Therefore, the group is in a strong position to benefit from improving economic conditions.
On March 19, Kinder Morgan shares hit a 52-week low of $9.42. While KMI stock has risen from recent lows, I believe the second half of the year will bring even further capital appreciation. With the dividend yield currently at 6.5%, KMI is an energy stock to buy for the long run.
Viper Energy Partners (VNOM)
The third stock I’d like to discuss is Viper Energy Partners, which has direct mineral interest ownership in Midland County, Texas, within the North American Permian Basin. Since the 1920s, the Permian Basin has been a massive oil-producing region. These mineral interests entitle Viper Energy to receive an average 21.4% royalty interest on all production from this acreage.
The oil and gas producer, a subsidiary of Diamondback Energy (NASDAQ:FANG), reported Q1 earnings in early May that handily beat out analyst estimates. Quarterly earnings per share (EPS) came in at 21 cents (analysts had forecast a loss of 1 cent), while total operating income of $78.69 million for the quarter was better than analysts’ expectations of $75.26 million.
Its top three customers are Diamondback Energy, Concho Resources (NYSE:CXO), and Pioneer Natural Resources (NYSE:PXD). Therefore, you may also want to pay attention to the respective financial strength of these companies.
So far in 2020, the stock is down more than 50%. That being said, it’s still up from it’s coronavirus bottom: on March 23, VNOM shares hit an all-time low of $4.98. Now VNOM is hovering around $11.98. The current dividend yield of 3.31% makes the group an attractive energy stock to buy. It is expected to go ex-dividend next in the second week of August.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
