10 Best Energy Stocks to Buy for 2020

After a rough spring, some energy stocks have rebounded.

Energy stocks took a beating this spring, but many rebounded from their lows. Several energy stocks are good additions since they remain undervalued but have low debt levels and a higher amount of free cash flow. As the economy reopened, consumption of gasoline and other crude oil products rose and crude oil prices followed suit. Lower crude oil prices are likely to stay for the rest of 2020, but volatility has diminished. The market has returned to something resembling "normal," but the market remains in oversupply that is exacerbated by a sluggish economy, says Charles Sizemore, chief investment officer of Sizemore Capital Management in Dallas. Energy stocks as a group are cheap and priced to outperform in an otherwise expensive market. "But this is still a sector in decline with a murky future," Sizemore says. "It looks a little like Big Tobacco 20 or 30 years ago."

Chevron Corp. (ticker: CVX)

Unlike other major oil producers, Chevron has maintained its generous dividend yield of 6.1%. The oil behemoth acquired Noble Energy, another oil producer, for a $5 billion all-stock deal in July. Chevron faced a rough second quarter with an adjusted loss of $3 billion on revenue of $13.5 billion because it was forced to write down 100% of its $2.6 billion stake in its Venezuela business. The low price of crude oil resulted in another $1.8 billion in charges since oil was trading at a low of $19 a barrel. During the first quarter, Chevron had announced it was cutting capital expenditures to $14 billion and lowering operating expenses by another $1 billion.

Exxon Mobil Corp. (XOM)

Oil behemoth Exxon Mobil still has a strong balance sheet. Exxon provides a dividend yield of 8.3% and declared a cash dividend of 87 cents for the third quarter, same as the dividend in the second quarter of 2020. The company reported second-quarter revenue of $32.6 billion as production declined by 10%. Exxon, the largest U.S. oil company, slashed $10 billion from its planned capital expenditures in 2020 in the first quarter, and CEO Darren Woods said in a statement that it plans to "meet or exceed" cost-reduction targets for 2020. The hurdles to oil prices are a lack of demand and the "extreme oversupply" from years of over-investment, says Patrick Morris, executive vice president and director of Unicorn REH, a Dallas-based exploration and production company. "I think oil prices are $40-$50 a barrel and range-bound."

Kinder Morgan (KMI)

Houston-based pipeline operator Kinder Morgan reported a loss of $637 million in the second quarter as revenue dropped by 20% to nearly $2.6 billion and because of a write-down of $1 billion worth of pipelines. The company would have generated a $363 million profit without the write-down. The company still generates a generous dividend of 7.4% and is the top stock choice for Morris. Kinder Morgan has relatively low debt metrics for the midstream sector and "should be able to manage both its capex needs as well as its dividend from organic cash flow," says Stewart Glickman, senior equity analyst at CFRA Research in New York, which has a "buy" rating for KMI.

Williams Cos. (WMB)

Williams, a natural gas-focused operator of pipelines and other midstream assets, announced a second-quarter dividend of 40 cents per share, which is a 5.3% increase from its third-quarter 2019 dividend of 38 cents. The company has paid a common stock dividend every quarter since 1974 and provides a generous dividend yield of 8.1%. Electricity demand is anticipated to fall less compared with the transportation sector due to the pandemic, says Rob Thummel, a portfolio manager at Tortoise Capital in Kansas. Natural gas has emerged as the main fuel to generate electricity in the U.S. Williams reported a second-quarter net income of $303 million and anticipates adjusted EBITDA toward the lower end of between $4.95 billion and $5.25 billion. The company says 2020 growth capital expenditure is estimated at $1 billion to $1.2 billion, down from the original range of $1.1 billion to $1.3 billion.

Cheniere Energy (LNG)

Cheniere Energy is a pure play operator of facilities that liquefy U.S.-produced natural gas so it can be loaded onto ships and transported globally. It has been proven in the U.S. that replacing coal with natural gas and renewables will reduce carbon emissions, Thummel says. Many countries will need to import liquefied natural gas from the U.S. and elsewhere to reduce emissions. Cheniere is poised to grow alongside the rise in global demand for natural gas, he says. "The coronavirus will not stop the global energy evolution," Thummel says. "As part of the energy evolution, the world needs more energy and less carbon emissions. Other large energy consumers such as China and India need to take similar actions of reducing coal with natural gas and renewables to improve the environment."

Magellan Midstream Partners (MMP)

Magellan Midstream Partners, a refined products and pipeline operator, reported second-quarter net income of $133.8 million, compared with $253.7 million for the second quarter of 2019 due to reduced demand from lower crude oil prices and travel and economic restrictions from the pandemic. "Your safest bet in the energy space is midstream and particularly the more conservative names like Enterprise Products and Magellan Midstream, both of which yield about 10% at current prices," Sizemore says. "Both have very solid balance sheets and low leverage." Magellan's essential infrastructure assets are connected to many key U.S. refineries. Investors could take advantage of Magellan's "resilient business model, and its debt metrics are amongst the best of its peers," Thummel says.

Enterprise Products Partners (EPD)

Enterprise Products Partners, a diversified energy infrastructure operator, has an excellent management team, Thummel says. The company reported a $1 billion profit in the second quarter even though revenue dropped by 31% to $5.8 billion. Enterprise increased its cash payment to investors annually for the last 15 years and owns some of the most essential energy infrastructure assets in the U.S. The company's current yield is more than 10%, and its debt-to-EBITDA metric is on the low end relative to its peers. EPD and Magellan Midstream both have solid balance sheets and low leverage, but even in the midstream sector, there are risks today that would have been unthinkable a few years ago, Sizemore says. "As overleveraged producers are forced into bankruptcy, the contracts responsible for paying the midstream operators are at risk of being renegotiated in some cases. At current prices, the best-in-class pipeline operators are hard to ignore."

Phillips 66 (PSX)

Phillips 66, a downstream company with midstream assets, reported a second-quarter loss of $141 million, compared with a loss of $2.5 billion in the first quarter of 2020. Phillips 66 had cash and cash equivalents of $1.9 billion, and consolidated debt was $14.4 billion. In April, the company increased the size of its 364-day term loan facility to $2 billion, with $1 billion of capacity remaining undrawn as of June 30. The company also issued $1 billion of senior unsecured notes in April and an additional $1 billion of senior unsecured notes in June. The company has a "buy" rating from CFRA's Glickman and yields 5.9%.

NuStar Energy (NS)

NuStar Energy, a San Antonio-based master limited partnership, owns and operates 10,000 miles of pipeline and 75 terminal and storage facilities that store and distribute crude oil, refined products and specialty liquids. The company's operations are largely in the middle of the country, "where demand destruction was likely more muted," Glickman wrote in a research report. The company's 75 million barrels of crude oil storage in the U.S. will remain well-used by customers for the foreseeable future. NuStar declared a second-quarter 2020 common unit distribution of 40 cents per unit. The company's "risk-reward profile is now attractive despite severe macro headwinds," he wrote.

EOG Resources (EOG)

EOG Resources, a Houston-based oil and gas company, has a strong balance sheet with a net debt-to-capital ratio of 10%, which is superior to Exxon Mobil and Chevron, according to Glickman's report. The dividend yields more than 3%, and "although the payout ratios look very stretched, we still think EOG will defend the dividend, as have XOM and CVX," he wrote. EOG Resources still has a "plethora of well locations" despite shutting in crude oil production. The company's total debt outstanding was $5.2 billion for a debt-to-total-capitalization ratio of 20% as of March 31. Based on the $2.9 billion of cash on the balance sheet at the end of the first quarter, EOG's net debt was $2.3 billion for a net debt-to-total-capitalization ratio of 10%. EOG's liquidity includes a $2 billion senior unsecured revolving credit agreement as of March 31.

The best energy stocks to buy for 2020:

-- Chevron Corp. (CVX)

-- Exxon Mobil Corp. (XOM)

-- Kinder Morgan (KMI)

-- Williams Cos. (WMB)

-- Cheniere Energy (LNG)

-- Magellan Midstream Partners (MMP)

-- Enterprise Products Partners (EPD)

-- Phillips 66 (PSX)

-- NuStar Energy (NS)

-- EOG Resources (EOG)