The oil industry didn’t see too many moneymakers this year as oil prices hit an all-time low in April, going as low as -$37.63 per barrel. Although oil stocks have rebounded since then, many companies in the sector faced bankruptcy while others were on the brink of collapse.
Nevertheless, economies around the world run on crude oil and many companies in the industry have made an epic rebound. This was induced by an increase in demand for oil and supply cuts by major oil-producing nations.
As the oil sector puts the worst effects of the coronavirus behind it, it’s worth getting behind some of the biggest names in the industry to support the rally. For value investors, the current economic environment in the energy sector provides the perfect backdrop to pick up oil stocks at discounted prices.
Here are five oil industry plays to consider adding to your portfolio for the long-haul:
- Diamondback Energy (NASDAQ:FANG)
- Chevron (NYSE:CVX)
- Enbridge (NYSE:ENB)
- Exxon Mobil (NYSE:XOM)
- EOG Resources (NYSE:EOG)
Oil Stocks: Diamondback Energy
First up on this list of oil stocks is Diamondback. Like many of its O&G counterparts, Diamondback Energy, an independent oil producer that drills in the Permian Basin, had big plans for 2020. That was soon upended by the decline in crude oil prices which led the company’s stock value to drop by 55%.
However, FANG’s stock price has rebounded since then and is currently trending at $40.73. While this is nowhere near the stock’s 52-week high of $106.50, it still serves as a great buying opportunity for value investors.
In response to the dip in oil prices earlier this year, Diamondback Energy lowered its drilling activity which cut production levels. Although the company could not initiate its original spending plan for the year, it did free up cash flow which helped FANG retain dividends and improve its bottom line.
While the free cash flow (FCF) in Q2 is not nearly as high as Q1, it was still enough to soften the blow of the decline in earnings. Moreover, oil prices have also increased in the past few months, which has led the company’s stock price to rise by 33%. This coupled with the large amounts of cash will help Diamondback Energy make the most of the upcoming year.
Despite the positive outlook on the oil economy and oil stocks, Diamondback Energy has no plans to increase oil production but will still benefit from capital expenditure (CAPEX) savings. The cash flow generated from this will help the company repurchase its stock and bolster its market value. Investors who have a long-term view on the commodities market will find Diamond Energy stock a worthy investment.
Companies like Chevron had a rough start at the onset of the pandemic with its stock price losing more than 40% of its value. However, the oil giant has come a long way since and remains one of the top buys in the oil sector today.
Chevron is looking to make some long-term plays and closed the deal to acquire Noble Energy last week for $5 billion in stock. While the acquisition didn’t do much for the company’s stock price, it did set the oil producer up for long-term gains.
The deal with Noble Energy will allow Chevron to enhance its existing position in the Mediterranean and West Africa while adding new areas of operations to its portfolio. The company also believes that the deal could improve its return on capital employed (ROCE) and increase free cash flow.
Chevron also remains a good buy for its dividends. While the company’s yield is only half of that of its counterpart BP at 5.8%, the long-term dividend prospects for the company are significantly better. Chevron holds the title of Dividend Aristocrat in the S&P 500 for consecutive dividend increases over the last 32 years. The same cannot be said for BP, which has slashed its dividends multiple times.
Another reason to put your money behind Chevron is its strong balance sheet. The company maintains a low debt-to-equity ratio of 22% compared to the industry average of 47%. Moreover, CVX was also able to decrease its CAPEX from $20 billion (forecasted) to just $14 billion. Although Chevron’s stock price may not be as attractive as its peers, the company’s sustainability provides this investment with a lot of upside potential.
Enbridge stock hasn’t rebounded as much given the recent surge in oil price,s but the company’s strong fundamentals make this oil stock a good investment for any trader. ENB’s strong suit is the sheer size of the company’s infrastructure. The oil behemoth has a pipeline system that stretches over 17,000 miles and transports 2.8 million barrels of oil each day.
As one of the most prominent oil producers in the world, a large percentage of Enbridge’s earnings are driven by the company’s transportation operations. With long-term contracts in place, the company will be able to generate steady cash flow in the coming years. The oil ENB has also paid consistent dividends over the last ten years.
Looking ahead, Enbridge will get a boost in valuation as it generates $11 billion in inventory from projects secured until 2023. This includes the PennEast Pipeline Project, which will meet the demand for natural gas in New Jersey and Pennsylvania. The company also estimates that the projects in its docket will bolster annual cash flow by 5-7%.
Enbridge’s attractive projects coupled with strong balance sheet numbers make this oil stock a compelling buy for the long-haul. It would wise to place your bets on this stock while the price is still in its $40s.
Exxon Mobil, once a shining star in the oil and gas sector, saw one of its worst years in 2020. The company lost nearly 35% of its market value and the stock price hit an all-time low. While the signs point to staying away from this investment, Exxon Mobil might actually be a great bargain buy for many investors.
One reason why Exxon has been able to weather the corona-economy with ease is thanks to its diverse portfolio of operations. Although the company generates a majority of its revenue from drilling for oil and gas, the pandemic led oil prices to fall below zero and decimated this side of the business. Thankfully, Exxon was able to fall back on its refining and chemical operations to stay afloat.
A decline in the price of crude oil output led to an increase in the consumer demand for oil which was a boon for the company’s downstream operations. But in addition to its fallback revenue, Exxon also made some major plays on the expense side of the balance sheet and reduced CAPEX by 30%. This sets the company up for big gains in the future, making it the perfect time to load up on Exxon oil stock while prices remain in the low $40s.
The last of the oil stocks on this list is EOG Resources. Headquartered in Houston, Texas, EOG is a power-player in the upstream oil production sector. The company has remained a favorite among many O&G investors because it has successfully leveraged technology and pricing power to lower costs. EOG’s stock price has increased by 2.5% since May 2020.
When crude oil prices declined earlier this year, the company curtailed its production capacity by 46%. This allowed the company to hold on to its resources and reignite a significant amount of production since then. EOG has discovered 9,500 wells which could produce 9.2 billion barrels of oil. As oil prices slowly pick up, these reserves could provide high returns for the company in the future.
EOG’s balance sheet is not too shabby either. The oil producer maintains a healthy debt-to-capitalization ratio which has been consistently lower in the last five years. The cash balance of $2,906 million is also significantly higher than the $841 million debt balance. Experts also believe that the company’s oil drilling activities in the coming year could generate $400 million in FCF.
EOG is a shining star in the O&G industry and a compelling buy for any investor. The company also boasts an earnings growth rate of 10.3% which is well above the industry average of 1.2%. Place your bets on this oil stock and reap its juicy rewards in the coming years.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020. As of this writing, Divya Premkumar did not own any of the aforementioned stocks.