When we think of energy stocks we usually think of oil and gas. But oil and gas companies aren’t energy companies. They bring up fuel from the Earth, which is then processed and burned by machines to create energy.
The difference matters in 2020. Climate change is real. The burning of oil, gas and coal is causing obvious damage. More important, there are now viable alternatives. The sun shines and the wind blows. Wind and solar can be turned directly into energy at costs competitive with oil and gas.
This transition has put a thumb on the scale of oil and gas prices, dimming the industry’s future. The COVID-19 pandemic, and the Saudi-led price war that followed, destroyed the profits in much of what we call the oil patch. How fast it comes back (and whether it comes back), depends partly on demand, and partly on how fast renewable energy scales.
Oil has always been a boom-and-bust business. My own career started during the 1970s boom, at the Houston Business Journal. During my stint there the late George Mitchell told me about an idea called “fracking,” or fracturing rock deep underground to coax oil and gas to the surface. That created a second boom in the 2010s.
But that boom, too, has now busted. Chesapeake Energy (NYSE:CHK), one of the largest fracking companies, declared bankruptcy on June 21. The shares were still trading at the time I wrote this at $11.85 each, after a 1 for 200 reverse split a few months prior. I tried to warn investors away on May 27 but some were burned anyway.
Is there life in the industry after the Chesapeake bankruptcy? Previous busts have always been followed by booms in energy stocks. This time it may be different.
Even with lower spending due to the pandemic, renewable energy supplies increase year by year. The International Energy Agency forecasts almost 200 GWatts of renewable power will be added in 2021, 78 GWatts in China alone. Once a solar or wind installation goes into production, that demand is taken out of the market for many years.
Despite the importance of oil companies to the U.S. economy, analysts are growing increasingly cautious. Change is in the wind. Here are seven energy stocks to consider:
- Exxon Mobil (NYSE:XOM)
- BP (NYSE:BP)
- EOG Resources (NYSE:EOG)
- Marathon Oil (NYSE:MRO)
- Occidental Petroleum (NYSE:OXY)
- Halliburton (NYSE:HAL)
- Enphase Energy (NASDAQ:ENPH)
Exxon Mobil: The American Hope of Energy Stocks
First up on this list of energy stocks is Exxon Mobil. No company remains as devoted to securing American oil and gas independence than Exxon is. That depends, of course, on how you define American.
Exxon shares closed June near $44 each, a market cap of $185 billion, down 37% on the year. This despite the company maintaining its 87 cent per share dividend, which now yields 7.85%.
A high dividend can be a yield trap, as I wrote in early May. When a company’s dividend yield becomes excessive, it means investors don’t think the company will continue to pay it. Many such traps have snapped shut in the latest bust.
Exxon has paid, thanks in part to diversified operations, in part to a board determined to protect the dividend, but also because of Guyana. Guyana, located on the north coast of South America, is where Exxon has made 16 huge oil discoveries since 2015. The company expects to raise 750,000 barrels per day from Guyana in 2025 and considers that estimate conservative.
This means that unlike other energy stocks, Exxon continues to add to its proven reserves, assets through which traders measure future earning power. But how much it can get for its oil? The company’s own projections are for oil to average $60 per barrel through 2025, 50% higher than the current price.
If you buy that, buy Exxon.
British Petroleum: An Admission, or Greenwashing?
BP has spent 2020 cutting jobs and writing down assets, saying that oil’s days are numbered and that the industry must prepare.
The stock ended June 30 at about $23 per share, a market cap of $77 billion, down 39% for 2020. This means the 63 cent per share quarterly dividend yields over 11%. If Exxon is a yield trap, so is BP.
But it’s a trap some investors may find attractive, because BP is essentially liquidating itself, as I wrote June 17. The company is offering fat dividends on its remaining reserves, writing down what it doesn’t expect to develop, and says it’s moving out of oil and gas.
The company’s investments in new technologies, however, are minuscule next to its valuation. It is acting because its long-term assumption is that oil will remain at $55/barrel, and it doesn’t have many reserves it can bring up at that price.
To his credit, new CEO Bernard Looney is honest in saying that big oil is going the way of big tobacco. But BP is going away with it. If you do buy shares, watch the news carefully, because a yield is worth less if the underlying stock price falls.
For now, analysts at Tipranks say you’re safe. Their 12-month price target for the shares is 20% ahead of BP’s current price, at $29.67.
EOG Resources: How Cheap the Permian?
Companies that can’t produce their oil for under $60 per barrel, like those involved in the Alberta oil sands or North Dakota’s Bakken, are pulling back or, like Whiting Petroleum (NYSE:WLL), going bankrupt.
The last big American oilfield standing is the Permian Basin in West Texas and New Mexico. The Permian is America’s low-cost oilfield because the shale there is thicker than normal. Instead of drilling to a specific depth, turning the pipe across the shale and then pushing through liquid to crack the rock, Permian producers can drill straight down and frack at multiple depths with the same well. This is why EOG Resources still stands tall.
EOG ended June at about $50 per share, a market cap of $29 billion, and with a 37.5 cent/share dividend yielding just 3.02%. This low yield is based on the market’s expectation that the dividend will remain.
The company failed to deliver that in earnings for the first quarter, with net income of just $9.8 million, 2 cents per share, and revenue of $4.7 billion. EOG hopes to return to profit by cutting expenses. It announced a cut in its capital budget of 46% on May 7.
EOG stock has also stayed up thanks to the Saudis, whose production cuts seem to be holding, as I wrote on May 18. Cuts in OPEC+ production mean EOG should be able to make money at about $40/barrel. If demand picks up after the pandemic, today’s price may even look cheap.
That’s the view of most analysts, who currently give EOG an “outperform” rating. The average 12-monthly price target is $66.77, which would be a 33% gain from its June 30 price.
Marathon: Speculation on a Higher Price
Oil prices and some energy stocks made a spectacular comeback in May and June, with some grades breaching $40 on July 1.
Whether you buy Marathon Oil (NYSE:MRO) depends on whether you think producers can keep the increases going. Shares opened July 1 at $6.14 each, a market cap of $4.8 billion. That’s up 86% over the last three months.
For the year it’s down 57%.
Marathon has been selling what it calls “non-core” assets for years. What’s left are four big U.S. shale oil fields in the Permian Basin, south-central Texas, Oklahoma, and North Dakota. (Marathon also owns part of an operation in Equatorial Guinea.)
The company is focused on cutting costs and hedging best. It raised 13% more oil in 2019 while reducing its cost per square foot of pipe deployed by 10%. Marathon also hedged 80,000 barrels of daily production at $55/barrel and used three-way collars to hedge more. Whether you buy Marathon today depends on where you see the supply-demand balance in 2021 and beyond.
Will the demand of India and China mean higher prices? Consultants in Europe don’t think so. They say demand peaked in 2019.
On the supply side, expect more foreign competition. Libya could soon be back online. Oil majors are also flocking to Namibia, off southern Africa, thinking it could hold more giant pools of oil like Guyana.
Marathon seems protected from the initial COVID-19 demand shock. It could make money if revenues fall 21% this year, to $4.2 billion. But Goldman Sachs (NYSE:GS) has downgraded Marathon to “sell,” based on its analysis of the supply-demand balance.
My own view is that, for the planet to survive, energy stocks like Marathon must die. Maybe that’s a political view. Maybe you disagree. If you do, buy Marathon.
Occidental: Fall of an Oil King
Oilmen with a tragic sense of humor coined the term “dead men drilling” for shale oil companies that exist only to pay back their debt. Occidental Petroleum, which beat Chevron (NYSE:CVX) to Anadarko Petroleum last year, is now such a company. In 2019 Occidental paid $55 billion for Anadarko, 80% of it in cash. The market cap of all of Occidental entering July was $16.3 billion.
Occidental blames the coronavirus. This took the price of oil from $52/barrel to a low below $13 during the lockdown and Saudi price war. The price has since recovered. West Texas Intermediate, the premium American oil grade, traded at $39.17 on June 30.
But as with any victim of a disaster, the damage remains. Occidental wrote off $6-9 billion in oil and gas assets just in the June quarter. This was on top of $2.2 billion written off in the first quarter. It means Berkshire Hathaway (NYSE:BRK.A), which helped fund the Anadarko deal with $40 billion in preferred stock, is getting stock instead of cash. Other shareholders are getting practically nothing. In 2019 Occidental paid $4.70/share in dividends.
While selling new debt keeps Occidental alive into 2023, there’s another $5 billion of debt maturing by 2024, not including any three-year notes that are in the new financing package.
If production cuts can take oil back near its $60 pre-pandemic price, and if Occidental can keep selling assets at good prices, it could generate cash flow to pay down the debt. It could even be a stock worth buying. Analysts at Truist (NYSE:TFC) and Bank of America (NYSE:BAC) both upgraded it recently.
For now, Occidental stock is a speculation, a leveraged bet on higher oil prices. Even Berkshire Hathaway legend Warren Buffett isn’t sitting pretty. Berkshire’s 8% sure thing has become a $40 billion albatross. He could take a huge loss in bankruptcy.
Halliburton: The Future of Services
Oil stocks and oil prices are down. This has been a disaster for companies that service their wells. Halliburton, the oilfield services company once run by former vice president Dick Cheney, is a good example.
A reported loss of $1 billion, $1.16 per share, on revenue of $5 billion during the March quarter is just part of it. While domestic activity dropped 25% during that quarter, the company said, international completions were up 5%.
The rest of 2020 will be worse. Halliburton laid off nearly 1,000 at its headquarters in May. Another 1,700 were let go in Colorado, Oklahoma, and Texas oil fields. They were the company’s fourth round of layoffs this year.
The dividend was also slashed 75%. The payout had been just 18 cents per share and cost just $160 million. Now the cost will be less than $40 million.
Halliburton indicates the boom-bust nature of the oil business. Revenues peaked in 2014 at a run rate of nearly $33 billion. They were at $23 billion as recently as 2018. They have been as low as $16 billion in 2016. The March results indicate a run rate of $20 billion.
The most serious balance sheet issue is Halliburton’s long-term debt. This stood at $9.6 billion at the end of the quarter. Debt peaked at about $15 billion in 2015.
During the first quarter Halliburton’s board managed to cut debt by $500 million, taking a $1.1 billion impairment charge on earnings. A new $1 billion debt issue, paying 2.92% to 2030, helped retire $1.5 billion in higher-interest bonds dated 2023 and 2025. Those bonds were recently trading at 91 cents on the dollar.
Despite its actions Halliburton now has $1.50 in debt for every $1 in equity. S&P lowered its rating on the debt to BBB+ in March, with a negative outlook.
Investors, however, fully expect a recovery in energy stocks like HAL. Shares bottomed at $6 but then doubled by the end of June to over $12. More analysts rate it a “buy” than a sell. But investors may be getting ahead of themselves. The average analyst one-year price target of $8.29 is 32% below the June 28 price of $12.19.
Enphase ENPH: The Solar Revolution Gets Real
Oil and gas companies don’t produce energy. They produce fuel, which engines turn into energy.
For all these companies, storage is a challenge. Oil companies use storage tanks, and gas companies use pipelines or tankers to store their excess. Solar energy companies create the equivalent of engines, but these must still store what they produce, or lose it. The shortage of scaled, intelligent storage has kept the market back, especially the residential market.
Stock in Enphase Energy got hot in 2020. The company’s batteries, management software, and monitoring equipment allow for more intelligent storage and delivery of solar energy. This can increase demand in residential markets that had been moribund.
Of energy stocks, Enphase is on fire, in the nicest possible way.
Enphase has been around since 2006 and has over 300 patents. The stock took off in 2019 when it introduced battery storage based on its Ensemble energy management system.
The first quarter report shows that business is now booming. Revenue of $205 million was double last year’s figure, and Enphase brought $69 million of that, 50 cents per share fully diluted, to the net income line. The stock is up sharply in 2020, the market cap nearly $6 billion.
Enphase competitor Solaredge (NASDAQ:SEDG) calls the result “smart energy,” and its stock is also up this year. Solaredge brought 10% of its $431 million in first quarter revenue to the net income line. It ended the quarter with enough cash on hand to pay off all its long-term obligations. Its market cap in late June was $7.4 billion.
The inverter breakthrough has solar bulls making what I call “hockey stick” graphs, projections of rising growth over several years. Costs for solar power have fallen by 90% in the last decade, but by 2022 they could fall another 34%. New materials can accelerate that as engineers crack the problem of durability.
The Bureau of Labor Statistics says the fastest-growing job category of the next decade will be solar installer.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
