Some energy stocks are still good additions for your portfolio.
The valuations of energy stocks declined rapidly as crude oil prices tanked when global demand contracted amid the health crisis. Low crude oil prices are likely to remain for the rest of 2020, but energy companies with manageable debt levels and cash flow could be good additions to a portfolio. While oil prices have rebounded off their historic lows, investors can still buy energy stocks at a massive discount. The energy sector has been hit by not one but two black swan type of events, says Rob Thummel, managing director and senior portfolio manager at Tortoise Capital in Leawood, Kansas. "In today's market, certain companies that operate essential assets in the energy sector could be good investment opportunities for investors looking for value-oriented stocks," he says.
Williams Cos. (ticker: WMB)
Williams is a natural gas-focused operator of pipelines and other midstream assets. The company's core asset footprint is in the Northeast, where it provides gathering and processing services to Marcellus Basin natural gas producers. Electricity demand is expected to decline less than transportation demand as a result of the health crisis, Thummel says. "Natural gas has become the leading fuel to generate electricity in the U.S., so Williams should experience less in terms of demand declines in the products it transports relative to its peers that are transporting oil derivatives such as gasoline and jet fuel," he says. Williams reported a first-quarter net loss of $518 million but a 4% increase in adjusted EBITDA to $1.26 billion and 10% increase in discounted cash flow to $861 million.
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 a ship 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 around the world will need to import liquefied natural gas from the U.S. and other countries 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 is an operator of refined products such as gasoline, diesel, and jet fuel and crude oil pipelines, with a focus in the Midwest. Magellan's essential infrastructure assets are connected to many key U.S. refineries. "As local economies begin to reopen, it is expected that drivers will return to the roadways in a significant way," Thummel says. Magellan's pipeline use is forecast to rise as consumers return to driving to work or activities. "In the meantime, investors could benefit from Magellan's resilient business model that offers investors a compelling 10% current yield," Thummel says. "Magellan's debt metrics are amongst the best of its peers."
Enterprise Products Partners (EPD)
Enterprise Products Partners is a diversified energy infrastructure operator with an excellent management team and a long track record of success, Thummel says. 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. "Enterprise has benefited and likely continues to benefit from growing U.S. exports of crude oil and natural gas liquids such as propane and ethane," Thummel says. The company has the highest cash coverage of its dividend distribution in the industry and huge shareholder alignment with management, says David Bahnsen, chief investment officer of The Bahnsen Group in Newport Beach, California.
Chevron, a major oil producer, has held onto its sizable dividend yield of 5.4%, unlike other energy producers. The company's production increased year over year during the first quarter, but the energy behemoth says it will slash capital expenditures down to $14 billion this year from its initial projections of $20 billion and lower its operating expenses by another $1 billion. "We own Chevron because of 70 years of dividend payments and 45 years of dividend growth through many down cycles along the way," Bahnsen says. Energy companies with higher cash levels and liquidity will allow them to weather the downturn. "There is no question the best opportunities exist in the highest quality of names -- Exxon (XOM), Chevron, Enterprise Product Partners and Kinder Morgan (KMI)," he says. "In all four cases, the primary asset is balance sheet strength."
Kinder Morgan (KMI)
Houston-based pipeline operator Kinder Morgan increased its dividend by 5% during the first quarter despite a net loss of $306 million, compared with net income of $556 million in the first quarter of 2019. The company said its internally generated cash flow can fully fund its 2020 dividend payments along with its 2020 discretionary spending without needing to access equity markets. Patrick Morris, executive vice president and director of Unicorn REH, a Dallas-based exploration and production company, says his top stock choice is Kinder Morgan since it still pays a dividend yield of 6.8%. Kinder Morgan is down 26% year-to-date, has relatively low debt metrics for the midstream sector and still "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.
Phillips 66 (PSX)
Phillips 66 is a downstream company with midstream assets. Phillips 66 reported a first-quarter loss of $2.5 billion and adjusted earnings of $450 million. Share repurchases were suspended, and the company secured a new $2 billion term loan facility and completed $1 billion in bond issuances. Phillips 66 had cash and cash equivalents of $1.2 billion, and consolidated debt was $13 billion, including $3.5 billion at Phillips 66 Partners (PSXP) as of March 31. The company has a "buy" rating from CFRA and yields 4.6%, Glickman says. "The shares of Phillips 66 are down 36% year-to-date, net debt to capital is 34% which is slightly above prior levels, but not terrible, and its chemicals business where much of its output goes into consumer end-markets like cleaning products is seeing strong demand from Asia," he says.
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. "The decision to trim the quarterly distribution by 33% to a revised $0.40 per unit (thus yielding around 13%) looks more defendable, in our view, and along with strongly reduced capex spend as well as an improved debt maturity profile, we think the risk-reward profile is now attractive despite severe macro headwinds," Glickman 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 industry stalwarts Exxon Mobil and Chevron, according to Glickman's report. The dividend yields nearly 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 reported first-quarter 2020 net income of $10 million compared with first-quarter 2019 net income of $635 million. EOG generated $1.7 billion of discretionary cash flow in the first quarter of 2020. The company lowered its operated rig count from 36 rigs to eight rigs during the last six weeks and anticipates an average of six rigs operating for the remainder of 2020.
Exxon Mobil Corp. (XOM)
Oil behemoth Exxon Mobil still has a strong balance sheet and provides a dividend yield of 7.5%. The company reported its first quarterly loss in three decades, of $610 million, and took a market-related $2.9 billion charge. Exxon, the largest U.S. oil company, slashed $10 billion from its planned capital expenditures in 2020, a 30% budget cut. "Buy the best and to heck with the rest," Morris says. The reasons Exxon, Chevron, Enterprise and Kinder exist in The Bahnsen Group's portfolio is because of multiple decades of dividend sustainability, capital expenditure budgets that have been reduced to "accommodate the need for capital flexibility and a world-class franchise that touches the oil and gas space, but right now has historically low valuations," Bahnsen says.
The best energy stocks to buy for 2020:
-- Williams Cos. (WMB)
-- Cheniere Energy (LNG)
-- Magellan Midstream Partners (MMP)
-- Enterprise Products Partners (EPD)
-- Chevron (CVX)
-- Kinder Morgan (KMI)
-- Phillips 66 (PSX)
-- Nustar Energy (NS)
-- EOG Resources (EOG)
-- Exxon Mobil Corp. (XOM)