This year has been potentially one of the most challenging years for energy stocks. In a historic event, oil prices traded in negative territory.
Gradually, the industry seems to be overcoming the headwinds. Brent oil currently trades at $42 and I believe that some upside is due as fall approaches.
According to U.S. Energy Information Administration, the cost of crude oil is a major component in the price of heating oil. Therefore, as the demand for heating oil increases, higher oil demand can boost energy stocks sentiments.
At the same time, as 2021 approaches there is hope for gradual recovery in the global economy. This is likely to trigger upside for crude oil and energy stocks. Any significant development related to the novel coronavirus vaccine can act as another catalyst.
These four energy stocks are worth considering for the coming quarters. These stocks have been in a consolidation zone and look attractive:
4 Energy Stocks to Buy: Chevron (CVX)
CVX stock is among the high-quality names among energy stocks. Besides the company having a robust growth visibility, CVX stock offers an annual dividend of $5.16 per share. A dividend yield of 5.9% is attractive for income investors.
The first reason to like Chevron is the company’s robust fundamentals. For the second quarter of 2020, the company reported a net-debt ratio of 17%. This gives the company ample headroom for aggressive growth.
Chevron already has quality upstream assets that includes the Permian along with assets in Gulf of Mexico and Brazil. The company is well positioned for steady production and cash flows in the long-term.
Even for the current year, the company’s Permian asset is likely to be free cash flow positive. Therefore, assets have an attractive break-even. Overall, with a strong credit profile, Chevron is positioned for growth and shareholder value creation.
CVX stock has been relatively sideways in the last few months. As fall approaches and demand for oil increases on a relative basis, higher oil price can trigger a break-out on the upside.
Kinder Morgan (KMI)
With an industry leading position in North American energy infrastructure, Kinder Morgan is a company worth considering. KMI stock has also been in a consolidation zone in the last few months and can potentially break-out on the upside. Another reason for liking KMI stock is the dividend factor with a current dividend yield of 6.6%.
Kinder Morgan is also attractive from a revenue stability perspective. The company has 68% take-or-pay contract that ensures fee collection regardless of throughput capacity. In addition, 74% of the company’s clients are investment grade companies. This ensures clear cash flow visibility and sustained dividends.
From a balance sheet perspective, Kinder Morgan expects a net-debt-to-adjusted-EBITDA of 4.7 by the end of the year. I am not concerned about the relatively high leverage with the company having stable cash inflows.
In terms of growth, the company has $2.9 billion in commercially secure projects that are underway. As these projects are executed, the company’s cash flow is likely to increase. Therefore, there is visibility for dividend growth in the coming years in addition to stock upside.
Marathon Oil (MRO)
Marathon Oil is a relatively small name in the energy industry and I believe that MRO stock is poised for upside from current levels.
A key reason to like Marathon Oil is that the company has been focused on cost reduction. For the second quarter, the company reported a unit production cost of $4.09 per barrel. Furthermore, for the second half of 2020, the company expects free cash flow break-even in the low $30 per barrel range.
As oil gradually trends higher, I expect FCF acceleration for the coming in the coming quarters. Additionally, Marathon Oil has a robust liquidity buffer of $3.5 billion. The company is therefore fully financed for investments in the next 12 to 24 months.
Overall, MRO stock has been subdued in the recent past. However, the company has strong fundamentals coupled with attractive assets. A strong rally from current levels is likely.
Exxon Mobil (XOM)
XOM stock is trading at the same level as it was in the beginning of March 2020. Analyst price target suggests that the stock has a potential upside of 11.2% from current levels.
Even a 10% upside is attractive for a stock that currently has a dividend yield of 8.2%. I therefore believe that fresh exposure can be considered to XOM stock after an extended period of consolidation.
In terms of growth, I believe that the company’s upstream segment is likely to deliver higher EBITDA margin and cash flows in the coming quarters. In the coming years, the Permian and Guyana assets are likely to deliver production upside.
Exxon Mobil has also been focused on cash operating expense reduction. That should help in boosting margins as oil gradually trends higher. In the near term, demand for oil is likely to increase as fall approaches. Relatively higher oil price can potentially imply a breakout rally for XOM stock.
Overall, in terms of fundamentals, regional diversification, upstream assets and dividend, Exxon Mobil is attractive.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.