The fact that the Federal Reserve is contemplating shifting its easy money policies as early as mid-November shows that inflation isn’t as transitory as thought a couple months ago. And that’s great news for energy stocks.
When inflation rises, the dollar weakens as interest rates rise. That means it takes more dollars to buy commodities like oil, for example. Certainly, the supply chain problems have something to do with this but it’s also a lack of supply that started during the pandemic last year.
Now, demand bounces back — until the delta variant slowed things down again — but it’s tough to ramp up production in a quarter or two. It’s certainly a unique situation.
But that doesn’t mean you have to wait until things get better before stepping into the market. Energy stocks like the ones below can be a great addition now, as we see that energy prices will remain high for some time to come. Another noteworthy aspect of these stocks is that each has an A-rating in my Portfolio Grader.
- Continental Resources (NYSE:CLR)
- ConocoPhillips (NYSE:COP)
- Diamondback Energy (NASDAQ:FANG)
- Marathon Oil (NYSE:MRO)
- HollyFrontier (NYSE:HFC)
- ONEOK (NYSE:OKE)
- Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B)
Energy Stocks to Buy: Continental Resources (CLR)
Exploration and production (E&P) companies are also called upstream energy companies. That means they’re the ones finding oil and natural gas and then selling it downstream.
CLR is an E&P player that primarily works out of the Bakken Shale in North Dakota and Montana. Its energy leans more toward oil than natural gas but it produces both. And both are in great demand, especially in global markets.
Since extraction costs are more or less fixed for E&P companies, the higher the price of oil and gas means the bigger the margins. And that’s precisely why CLR stock is up 203% year-to-date. But even after that run, its current price-to-earnings ratio is 48x. That’s a little high, but there’s a good chance earnings will be rolling in to justify it.
COP is a global E&P player with a nearly $100 billion market cap that also operates some midstream (pipelines, transportation) services to move production to demand markets.
This is a good time for COP since natural gas is in high demand in Europe and Japan, and oil is in demand in China. With a global E&P and distribution operation, COP can supply them with what they need efficiently. And COP can realize expanding profit margins.
The stock has risen 95% YTD and is richly valued. But this is the way the energy markets work — big swings in either direction — and we’re in an multi-year uptrend now. Earnings will catch up.
COP also still has a 2.5% dividend, which isn’t beating inflation, but it’s a nice kicker.
Energy Stocks to Buy: Diamondback Energy (FANG)
FANG is a land-based U.S. E&P that has operations primarily in the Permian Basin, an energy-rich area in West Texas and Southeast New Mexico. The company has numerous properties in the basin and uses unconventional drilling methods — fracking and horizontal drilling — to access the reserves.
About 60% of its production is oil, another 20 is natural gas and the remaining 20% in natural gas liquids (NGLs). All these products are in high demand.
The trouble is, FANG has been struggling to keep its earnings in positive territory recently unlike other energy stocks. This shouldn’t be a problem moving forward, now that global energy demand has kicked into gear.
FANG stock has gained almost 130% YTD and has a 1.6% dividend. There’s still plenty of upside left.
Marathon Oil (MRO)
Like other E&P plays, earnings haven’t been great for MRO as we slowly emerge from the pandemic and the delta variant wave. But now we’re in recovery mode and demand it rising in all sectors, including energy stocks.
That’s great news for MRO, which has been drilling for black gold since 1887. And with that kind of legacy, today’s markets aren’t anything new to this company. It has seen a few things just as crazy since Grover Cleveland was president.
MRO stock is up 146% YTD and has a sub-1% dividend. But we’re not concerned about dividends now. This is about energy demand growth, and MRO will be a beneficiary.
Energy Stocks to Buy: HollyFrontier (HFC)
Once you get the black stuff out of the ground and ship it along a pipeline, the business of turning it into viable products begins at the refinery. And that’s where HFC comes in. It operates about a half dozen oil refineries and three asphalt terminals.
In energy parlance, refineries are part of downstream operations, along with distribution and marketing to retailers and wholesalers. This is a key part of the process since getting the oil out of the ground doesn’t mean much if it can’t be refined in a timely manner.
HFC is one of the smaller refiners in the U.S. — it has a $6 billion market cap — which means its gains will amplify in current markets. The stock is up 43% YTD and still trades at a decent current P/E around 31x.
Founded in 1906 as the Oklahoma Natural Gas Company, OKE is a leading natural gas and NGL marketer in the U.S. NGLs are derivatives found in raw natural gas that are then used in various industrial processes or for fuel.
The most common are ethane (plastic bags, anti-freeze), propane (fuel), butane (synthetic rubber, lighter fuel), isobutane (refrigerant, aerosols), pentane (gasoline) and pentanes plus (gasoline, ethanol).
The U.S. is like the Saudi Arabia of natural gas supplies. Even as prices have risen domestically, overseas prices are triple or are higher than they are here, which makes for great export opportunities.
This is a very good time for natural gas companies regardless of where they sit in the supply chain. And OKE is a sure beneficiary of the current demand but also a growing transition to cleaner burning (more efficient) fuels, which also boosts its interest with ESG investors.
OKE stock is up 75% YTD yet it only has a current P/E of 22x and offers an inflation-pacing 5.8% dividend.
Energy Stocks to Buy: Royal Dutch Shell (RDS.A)
As measured by revenue, Shell is among the largest companies in the world. That’s some rarified air. But if you can recall a few years ago, when energy prices were headed in the opposite direction as they are today, RDS.A wasn’t very attractive. It had cut its dividend and was tightening operations, shuttering wells … the whole nine yards.
But in good times, the big integrated oil companies are like the desert blooming after a rain. Big energy stocks can grow their margins upstream, midstream and downstream. And just a little growth in margins is huge when you’re talking about the scale of RDS.A.
Plus, Shell is actively looking to establish itself in renewable and alternative energy markets as well. For example, it can convert some of its natural gas into “blue” hydrogen and then begin to use its filling station networks as distribution points.
The stock has risen 35% YTD and it has a P/E of 34x. It also has a 2.6% dividend that’s unspectacular but dependable.
On the date of publication, Louis Navellier has a position in COP in this article. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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