Last year was definitely tough for energy stocks. Of course, the main reason was the pandemic. But it’s important to keep in mind that there were other major energy-related problems as well in 2020. For instance, there was an oversupply of oil because of aggressive production from companies like U.S. shale producers. There were also ongoing disputes among members of the Organization of the Petroleum Exporting Countries (OPEC).
Yet, despite all these problems, the traditional energy industry has been able to pull off a restructuring. The result? As the world economy begins to normalize, there will probably be a nice rebound in profits.
It’s true that the incoming Joe Biden administration will take a tougher stance on the industry. However, this probably will not be too big of a factor. Mohammad Niamat Elahee, a professor in the Department of International Business at Quinnipiac University, notes:
“Given Biden’s governance style and history of working across the aisle, it can be safely predicted that a Biden administration will not take any drastic actions that could disrupt the economy […] While Biden promised during his campaign to not allow new fracking on federal lands, his administration will not ban fracking and oil and gas exploration in private lands. Many oil and gas firms have already been making investments in emerging green technologies. Therefore, the fallout from any disruption will be less severe than anticipated.”
Okay then. So, if that’s the case, what are some of the energy stocks that look interesting right now? Well, here are seven:
- Exxon Mobil (NYSE:XOM)
- Chevron (NYSE:CVX)
- Valero (NYSE:VLO)
- Kinder Morgan (NYSE:KMI)
- Phillips 66 (NYSE:PSX)
- Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B)
- Total SE (NYSE:TOT)
Energy Stocks to Buy: Exxon Mobil (XOM)
Since late October, Exxon Mobil has been able to pull off a nice rally. XOM stock has gone from a low of $31.11 to $48.75 today, up nearly 57%. But it’s important to keep in mind that the stock price is still about 40% off its 52-week high of $68.42. In fact, its shares were even delisted from the venerable Dow Jones Industrial Average, of which it had been a member since 1928.
Yet, XOM is still a solid company. It has global scale and a diverse set of businesses, which include upstream, downstream, liquified natural gas (LNG) and chemicals.
In its latest quarter, the company announced a write off anywhere between $18 billion to $20 billion. Exxon also noted that there could be a fourth quarter loss. There have also been continued cost-cutting efforts, which will help streamline operations.
However, Wall Street analysts have been getting more upbeat about this pick of the energy stocks. Just look at Goldman Sach’s Neil Mehta — in a research report, he noted that XOM shares were undervalued and that cash flows would start to rebound in 2021.
Finally, there is the dividend yield. At 7.27%, it’s one of the highest among the mega oil operators.
On a relative basis, Chevron performed better than the other energy stocks. However, the shares are still off 21.6% from their 52-week high of $115.15.
Even before the oil markets came under pressure, Chevron had already been engaged in some major restructuring. Because of that, its profits did not get hit as badly as its rivals. But of course, with Covid-19, the company has had to increase its efficiency efforts. Now, CVX will likely see a robust profit growth as oil prices improve.
What’s more, Chevron has also turned to deal-making, with its most notable deal being the $5 billion purchase of Noble Energy. This will give the company access to lucrative fields in the Permian Basin as well as market in the Mediterranean.
As for the CVX stock dividend, it’s certainly attractive. The current yield is 5.6%.
The key to the refining business is the volumes of oil — not the price. After all, the profit is made on the spread in the pricing. However, with Covid-19, oil volumes got hit and so did the refiners.
But this has also presented opportunities for top players in the industry like Valero Energy. The company has the capacity for 3.2 million barrels per day and possesses large operations in the United States, Canada, the U.K. and elsewhere.
With a strong balance sheet and access to low-cost debt, Valero has used these advantages to continue its capital investments, such as with its St. Charles alkylation unit in Louisiana. These efforts will likely help improve the company’s long-term growth prospects.
Then there is VLO stock’s dividend. Valero’s 6.8% yield is pretty lucrative when it comes to energy stocks.
Kinder Morgan (KMI)
Kinder Morgan is a top midstream operator, with about 147 terminals and well over 80,000 miles of pipeline. The company’s business model is based on generating fees on the volumes of energy that are transported through its vast infrastructure. But of course, with the awful impact of the novel coronavirus, this business has suffered quite a bit.
That said, though, KMI has been able to stay profitable. The key to its success? Airtight contracts and a lean organization.
Kinder Morgan’s long-term prospects certainly look promising. And the fact is that there will likely to be continued strong growth in natural gas in the U.S. in the coming years.
While KMI stock has rallied recently — up from a November low of $11.48 to now $15.69 — its valuation is still reasonable. Note, also, that this pick of the energy stocks has a forward price-to-earnings ratio of 18.26 and a 6.78% dividend yield.
Phillips 66 (PSX)
Phillips 66 is a diversified company and the next pick on my list of energy stocks. It has 13 refineries and is able to produce 2.2 million barrels of crude per day. It also possesses midstream assets, a chemicals business and a network of over 7,000 retail outlets.
To deal with the challenging environment today, PSX has been swift to reduce its costs. In fact, the company fully expects to “exceed the $500 million in cost reductions and the $700 million in consolidated capital spending reductions announced earlier this year.” As a result, Phillips 66 has been able to generate strong cash flows, with $795 million in operating cash flow in its most recent quarter.
In the meantime, the company has also been taking steps to transition more of its business to cleaner energy. Some examples include its renewable diesel projects as well as its green hydrogen and solar efforts.
In terms of the valuation, PSX stock is at attractive levels. The stock has a forward price-to-earnings ratio of 13.61 and a dividend yield of 5.02%.
Royal Dutch Shell (RDS-A)
Until 2020, Shell had being paying out a dividend since 1945. However, with the difficulties caused by Covid-19, it had to cut its yield by more than half to 16 cents. Management did this in order to not load up the balance sheet with too much debt. The company also made significant cuts in cost structure as well as steep reductions in its capital budget.
These moves appear to have been spot-on. Over the past few months, RDS-A stock has rallied over 66%, up from its Oct. 1 close of $24.24 to over $40 today. Moreover, its financials have also been improving.
In October, the company announced that it would be increasing the dividend. Currently, the yield is 3.31%.
Finally, another part of the company’s survival strategy is to focus more on renewables and alternative energy. To this end, Shell is dedicating a significant portion of its capital budget to these efforts and has a goal to reach net-zero emissions by 2050 or sooner. That should keep this name competitive against the other energy stocks.
Last on my list of energy stocks is Total, one of the world’s largest energy companies, with operations in over 130 countries. TOT also has an attractive cost structure. For example, its organic breakeven is “below $25 per barrel” and operating expenses are at $5 per barrel. As a result, the company has been able to keep up its profitability. In Total’s latest quarter, adjusted earnings came to $848 million.
Regarding TOT stock’s dividend, this pick’s yield is at a healthy 6.9%. The company also will maintain a strong stance on its payout, so long as the price of oil remains above $40.
Finally, like other major oil companies, Total has been making investments in renewables. More specifically, it wants to derive about 15% to 20% of sales from renewables by 2040. It has also been making interesting investments and acquisitions in alternative energy companies. For example, it has major equity stakes in companies like Sunpower (NASDAQ:SPWR) and its spin-off, Maxeon Solar Technologies (NASDAQ:MAXN). Those could both be a nice source for growth.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.