Energy stocks have bounced back from March lows in a big way.
The energy sector has been a market laggard in recent years and was one of the hardest-hit market segments during the first-quarter market crash. West Texas Intermediate crude oil prices briefly fell below $0 per barrel at one point as U.S. storage capacity utilization approached 100% due to travel restrictions and the economic shutdown. But crude oil prices have come roaring back, and WTI is once again at about $40 a barrel. Here are eight five-star-rated energy sector stocks to buy on the rebound, according to Morningstar.
Exxon Mobil (ticker: XOM)
Unlike other oil stocks that are fighting for survival, analyst Allen Good says the biggest impact the soft market has had on Exxon Mobil in 2020 is that it likely delayed its near-term plans. Good says Exxon's target of doubling 2017 earnings and cash flow by 2025 may not happen on schedule due to spending cuts this year. However, he says Exxon is the highest-quality oil major, and its downstream and chemical segments differentiate it from competitors. Good says Exxon's 8% dividend is also safe for now. Morningstar has a "buy" rating and $74 fair value estimate for XOM stock.
Royal Dutch Shell (RDS.A, RDS.B)
Royal Dutch Shell shocked Wall Street in April by issuing its first dividend cut since World War II, cutting its payout by 66%. The stock sold off following the dividend cut, but Good says the difficult decision eliminated significant financial risk in a difficult oil environment. It also provides the company with financial flexibility to continue to invest outside of oil and gas. Even after the cut, Shell still has a nearly 4% dividend, and Good says the stock is significantly undervalued. Morningstar has a "buy" rating and $67 fair value estimate for RDS.B stock.
Total SA (TOT)
Total SA is another high-yielding oil major with about a 7.4% dividend. Good says the dividend appears safe after Total cut its 2020 capital spending by 25%. Total also shored up its liquidity by issuing $3 billion in bonds and drawing $6 billion in credit lines. Good says Total already has one of the lowest gearing ratios among its peers, and it should meaningfully improve its cash flow over the next several years. Total is projecting 5% average production volume growth through 2023. Morningstar has a "buy" rating and $68 fair value estimate for TOT stock.
BP announced as much as $17.5 billion in impairment charges in the second quarter, a number that may have spooked some investors. The charges are related to BP cutting its long-term oil and gas price projections. Good says BP plans to cut costs by $2.5 billion from 2019 levels by 2021. While 2020 production will be down year over year, Good says BP is on track to add new production in coming years that should have margins 35% higher than the current asset portfolio. Morningstar has a "buy" rating and $40 fair value estimate for BP stock.
Schlumberger is the world's largest oil services company. Analyst Preston Caldwell says Schlumberger's primary focus in the difficult environment is helping to lower the cost of oil and gas development via technologies developed by consistently outspending peers in research and development. In addition, recent cost-cutting efforts have the company well-positioned to capitalize on a potential recovery in oil and gas activity in the years ahead. Given the importance of low production costs, Caldwell says Schlumberger should gain market share. Morningstar has a "buy" rating and $48 fair value estimate for SLB stock.
Marathon Petroleum Corp. (MPC)
Marathon is one of the largest independent petroleum refiners in the U.S. Good says market fundamentals for refiners took a turn for the worst in 2020, including collapsing demand and crashing margins. Marathon and other refiners have responded by cutting capacity, and investors are hoping for a strong summer driving season as travelers avoid flying. Even though refining stocks have soared since the March lows, Good says Marathon's value still stands out as being particularly compelling at current levels. Marathon also pays about a 6.3% dividend. Morningstar has a "buy" rating and $65 fair value estimate for MPC stock.
Energy Transfer (ET)
Energy Transfer owns and operates more than 83,000 miles of pipelines used to transfer oil and natural gas liquids throughout the U.S. Analyst Travis Miller says Energy Transfer has the cash flow and liquidity to navigate the pandemic-related difficult environment. Energy Transfer averaged $8 billion annually from 2015 through 2018 building up its infrastructure. Now, Miller says investors can expect investment to slow, new projects to come online, cash flow to rise and leverage to fall. Energy Transfer pays about an 18.5% annual distribution. Morningstar has a "buy" rating and $21 fair value estimate for ET stock.
Baker Hughes Co. (BKR)
Baker Hughes is the second-largest oil field services company in the world following its 2017 merger with GE Oil & Gas. The merger gave Baker Hughes access to General Electric's big data and Internet of Things technology. Caldwell is projecting North American oil and gas capital expenditures will fall 36% through 2021, and revenue of oil field services companies will fall roughly in line with those levels. However, he says the health crisis will have only a modest impact on long-term oil demand, and capital spending will eventually recover beyond 2019 levels. Morningstar has a "buy" rating and $26 price target for BKR.
Energy stocks for the oil price rebound:
-- Exxon Mobil (XOM)
-- Royal Dutch Shell (RDS.A, RDS.B)
-- Total SA (TOT)
-- BP (BP)
-- Schlumberger (SLB)
-- Marathon Petroleum Corp. (MPC)
-- Energy Transfer (ET)
-- Baker Hughes Co. (BKR)