From small cap oil service firms to some of the world’s largest integrated global energy outfits, there is a wide range of opportunities to invest in oil & gas. Several leading investment experts, and ongoing contributors to MoneyShow.com, highlight a dozen favorite investment ideas to add some energy to your portfolio.
Stephen Leeb, The Complete Investor
We expect oil demand to continue to rise fairly steadily for at least the next generation.
Within the next two years, though, as pressures on supply grow, the uptrend in oil prices that began near the century’s start will likely resume. That’s good news for stocks with the greatest degree of cyclicality: oil service companies. Since its 2016 high point, the oil services group is down more than 70%.
Two small oil service companies, Frank’s International (FI) and Dril-Quip (DRQ), both will have tremendous leverage to the upside when the oil market turns. Meanwhile, they’re protected by their strong cash positions. Currently, Dril-Quip has $2 million in debt and $425 million in cash. Frank’s has no debt and around $250 million in cash.
Dril-Quip focuses largely on offshore drilling, offering products like subsea control systems and subsea wellheads and servicing all its equipment. Around 62% of its activities are in the Western Hemisphere.
Offshore drilling has been hit particularly hard by volatile oil prices, reflected in Dril-Quip’s results. As many competitors failed, Dril-Quip cut costs sharply while maintaining state-of-the-art products, leaving it exceptionally well situated for when oil exploration returns to better days.
Despite the company’s cash-heavy balance sheet, it should be regarded as speculative until the upturn becomes more visible. But if it hangs in, its industry position will be stronger than ever when the upturn starts. This is a stock whose potential upside is several times the current price.
Frank’s is a leading global provider of tubular services and products that maintain the integrity of drill pipes. More than 50% of revenues come from offshore wells.
But as with Dril-Quip, Frank’s’s balance sheet proves the company is a survivor. And also like Dril-Quip, it has increased its competitive mettle within a toxic group whose turnaround could be dramatic.
For both these oil service companies, the upside is many times the current share price. Patience will certainly be required, and they could drop further, but in the end the rewards should be substantial.
That’s the case of CNX Midstream Partners (CNXM), the Canonsburg, Pennsylvania-based natural gas pipeline company, that offers the opportunity to buy a stock in the energy patch that is selling for only 6.9 times earnings this year, has raised its dividend every quarter since February 2015 and now yields 9%.
Its business is booming. Revenues are up 15% to $257 million and earnings are ahead 50% to $121 million. It has a profit margin of 47% and a return on equity (ROE) of 24%. It is definitely under the radar screen of most Wall Street analysts. Its price/earnings to growth (PEG) ratio is 0.49 (anything less than 1 is considered excellent).
And CNX Midstream has an aggressive, young CEO, Chad Griffith, who recently took the helm and is rapidly expanding its pipeline network. The company was formed after CNX acquired Con Midstream Partners from
CNX Midstream has beaten Street forecasts four quarters in a row and probably will do so again when it reports in May. Not surprisingly, five officers and directors recently have been buying their company’s stock.
Based in Houston,
Kinder likens its business to a giant toll road. It receives fees from major oil companies, other energy producers and shippers and local distributors. That allows it to avoid commodity price risk. It also invests billions in new energy infrastructure to maintain and expand existing assets.
Lower oil prices have constrained new exploration and development. But they are stoking demand, not reducing it. Sales of big cars, SUVs and boats are up, not down. I estimate that Kinder will earn $1.06 a share this year and nearly $1.50 a share in 2020. And that may be too conservative.
At least, Co-Founder and Executive Chairman Richard Kinder seems to think so. He has purchased $50.5 million worth of the stock in the last two months to bring his
It is no mystery why Kinder is piling into the stock. Given the company’s projected growth, it is cheap at just 18 times prospective earnings and only 1.3 times book value. It also yields an attractive 4.2%. I expect an excellent total return here in the weeks and months ahead.
John Buckingham, The Prudent Speculator
Exxon Mobil (XOM) is the world’s largest integrated oil and gas company. While the company endured a tough 2018, things have been looking up so far in 2019, with shares up around 10% and a solid Q4 earnings release.
The firm posted adjusted EPS of $1.41 (vs. $1.08 est.), largely due to better downstream results than expected. Production finally rose, albeit slightly, with volumes increasing less than 1% as new growth from the Permian Basin and the Hebron project offset portfolio effects and natural gas declines.
Exxon Mobil is the only energy player with a Aaa credit rating (issued by Moody’s) and its fortress balance sheet and capital discipline give it the financial and operational flexibility we desire. The stock yields a rich 4.5%.
Total SA (TOT) is one of the world’s largest integrated oil and gas companies, with operations in exploration & production, refining & marketing, and chemicals.
In Q4, TOT earned $1.17 per share, missing consensus by a penny. The company reported an average 2018 crude price of $71 and has been shifting its E&P portfolio to assets with lower breakeven production prices. Respective consensus adjusted EPS estimates (in U.S. dollars) for 2019 and 2020 currently reside at $5.35 and $6.03, up from $5.05 in 2018.
The company has a $5 billion share repurchase authorization available and we like that Total’s production costs are meaningfully lower than most of its large integrated peers and that those costs should continue to drop over the next few years. The stock yields 4.3%.
John Reese, Validea
We select stocks based on the methodoligies of many of the stock market’s most successful and well-known investors.
Royal Dutch Shell
Under the Zweig methodology, the P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current market P/E because the situation is much too risky. Royal Dutch Shell’s P/E is 11.23, based on trailing 12 month earnings, while the current market PE is 15.00. Therefore, it passes the first test.
The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.
The first of these criteria is that the current EPS be positive. Royal Dutch Shell’s EPS ($1.35) pass this test. The EPS for the quarter one year ago must also be positive. The firm’s EPS for this quarter last year ($0.70) pass this test.
The growth rate of the current quarter’s earnings compared to the same quarter a year ago must also be positive. The company’s growth rate of 92.86% passes this test.
Another criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down.
If a company does have a high level, an investor may want to avoid this stock altogether. RDS.A’s Debt/Equity (38.67%) is not considered high relative to its industry (55.65%) and passes this test.
Richard Moroney, Dow Theory Forecasts
Drilling and refining giant
But Chevron seems capable of solid production growth while keeping capital expenditures in check to preserve capital returns for investors. Chevron expects production to rise 3% to 4% annually through 2023, with increased reliance on fracking in the Permian Basin.
Chevron has previously said that production should climb 4% to 7% in 2019, compared to 7% growth last year. Cash f ow should total $30 billion in 2019, assuming a global oil price of $60 per barrel.
That should leave about $4 billion for share repurchases and the rest for the dividend, raised 6% in January. Chevron targets a shareholder yield of 6% this year, which includes both dividends and stock buybacks. Chevron is a long-term buy.
Crista Huff, Cabot Undervalued Stocks Advisor
The company exceeded market expectations, reporting fourth-quarter earnings adjusted for non-recurring costs of $2.41 per share, far above all analysts’ estimates.
Profit margins were enhanced by processing cheap oil from Canada and by cost savings associated with the October 2018
Marathon is an undervalued stock with an attractive, growing dividend. As expected, Marathon recently announced a 15% dividend increase, from $0.46 to $0.53 per quarter.
Consensus earnings estimates reflect slow 2019 growth followed by a huge jump in 2020 EPS. The 2019 p/e is 9.8. The stock offers a yield of – yield 3.3%. I expect the shares to eventually reach its previous high at $85. Marathon is a strong buy.
Brit Ryle, The Wealth Advisory
The company has beat expectations in each of the past four quarters. The company has also partnered with Kayne Anderson to create new Permian midstream company.
The global oil market is getting a boost thanks to potential deals in the U.S.-China trade talks. And Permian crude is getting a boost thanks to new pipelines coming online. This is creating a perfect situation for Apache investors.
I see these shares heading much higher by the end of 2019. Earnings come out later this month. If they’re as impressive as I think they could be, then we’re likely to see another big move after the release. Apache is still a “Buy.” The limit entry price is $40, and my 12-month target is $55.
Tom Hutchinson, Cabot Dividend Investor
Magellan Midstream Partners (MMP) is one of the best pipeline MLPs in the country. It has a massive network of refined product and crude oil pipeline that is connected to more than 50% of U.S. refining capacity. But recent returns for Magellan have been subpar.
Over the past 10 years, the MLP has generated an average annual return of 19.6%. But over the past five years, the average annual return has been a mere 3%, and the stock price is where it was back in October 2013. Yet Magellan has grown earnings by an average of 10.3% per year during those give years.
Magellan sold off some less productive assets last year and will continue somewhat this year. But opportunities for new projects are massive as the energy sector booms. In 2020, Magellan has three huge projects coming online that should boost the bottom line and the market will likely begin to price that in around the middle of the year.
In the meantime, you get more than a 6% yield on a cheap stock that is a behemoth in a rapidly growing industry. It should be worth the wait and the current price is a good entry point.
Enterprise Products Partners (EPD) is one the largest midstream energy MLPs in the country with a vast portfolio of service assets connected to the heart of American energy production.
The partnership isn’t exposed to volatile commodity prices but rather collects a fee for the transport and storage of oil, gas and refined product. Over 90% of earnings are fee based. It’s at the epicenter of the American energy renaissance.
High quality is something every income investor should seek. And this is the bluest of blue-chip companies in the asset class. It has raised the distribution every year for the past 20 years, and for 58 straight quarters.
Meanwhile, it has just a 60% payout ratio of free cash flow, which enables it to fund projects without incurring too much debt, and has one of the highest credit ratings in the business. It pays no incentive distribution rights to a general partner and can pay all of its distributable cash flow to investors.
Enterprise has $2.1 billion in recently completed growth projects coming on line this year and another $6 billion for the next couple of years. It should grow cash flow by 4% to 9% over the next couple of years, which combined with the 6.2% yield should provide double-digit annual returns.