4 energy stocks ready to ride out the sector's troubles

Investors should note these energy stocks that are likely to make a strong comeback during 2021.

  • By Faisal Humayun,
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The novel coronavirus pandemic has translated into a global gloom for the fiscal year 2020. With a global economic contraction, the energy sector has witnessed challenging times. Energy stocks are therefore having a difficult year even as the broad markets trend higher.

However, there is light at the end of the tunnel. The International Monetary Finance projects global GDP growth of 5.2% in the coming year. The World Bank is also expecting GDP to expand by 4.2% in the coming year.

Hopes of growth revival have an additional catalyst in the form of a potential vaccine against Covid-19. Pfizer (PFE) and BioNTech (BNTX) recently announced that their mRNA-based vaccine candidate indicates a vaccine efficacy rate above 90%. Even Moderna (MRNA) is expected to start Phase 3 trials in FY2021. The company has already signed contracts with several governments for millions of vaccine doses.

A potential vaccine can be a game changer for the coming year.

Considering these factors, I believe that the worst is over for the energy sector. It’s a good time to accumulate quality energy stocks for a potential rally in the coming year.

Let’s discuss four energy stocks that can trend higher in FY2021. I believe one of more of these energy stocks are worth holding in the long-term portfolio.

BP

BP (BP) stock is my top-pick among energy stocks. As Pfizer announced positive results from the vaccine trials, BP stock surged by 15%. Still, BP stock is lower by 53% in the last year. Once the vaccine hits the market, I expect a bigger rally for the stock.

A strong capital discipline is the first reason to like BP. The company’s net debt for the third quarter of 2020 was lower by $11 billion as compared to Q1 2020. Further, the company’s cash balance point is $42 per barrel. As oil trends higher in the coming year, I expect free cash flows to accelerate.

Another reason to like BP is the company’s focus on transformation from an integrated oil company to an integrated energy company. BP is looking at increasing the share of renewables in the company’s portfolio.

In China, the company signed an agreement with JinkoPower Technology, a leading solar project developer. China happens to be the world’s fastest growing renewable market. Even in the United States, BP has initiated an offshore wind project through a partnership with Equinor (EQNR).

In the next decade, renewables will be a potential game changer for the company. At the same time, the company’s hydrocarbon business has a steady growth visibility. It’s likely to remain the key EBITDA and cash-flow driver.

Countries like China and India are still energy thirsty. Significant demand growth is likely in the coming years. This will ensure that oil trends higher in the long-term. BP stands to benefit as it invests cash from the hydrocarbon business into the new energy business.

Cabot Oil & Gas Corporation

COG (COG) stock has been an out-performer among energy stocks. In the last year, the stock declined by just 9.4%. The stock is attractive for the coming year with hopes of economic revival.

An important point to note is that the company guided for positive FCF for the current year. Even with the energy-price headwinds, the company is on track to deliver FCF for the fifth consecutive year.

Besides strong numbers for the current year, Cabot has a bright outlook for FY2021. The company expects to deliver production of 2,350Mmcfe per day. Importantly, the company guided for FCF expansion and deleveraging. Cabot is expecting net-debt-to-EBITDA to fall below 1.0.

Therefore, with a strong balance sheet, attractive cash flow break-even and a dividend yield of 2.4%, COG stock is worth considering. The company’s return to shareholders is pegged at 50% of FCF. I therefore expect dividend growth in the coming year.

From a long-term perspective, the company has proved reserves of 12.9Tcfe. This is likely to ensure steady production growth in the coming years. Given the company’s cash-flow visibility, I would consider COG stock for the core portfolio.

Pioneer Natural Resources

PXD stock (PXD), which declined by 35% in the last year, is another quality name to consider among energy stocks. Pioneer Natural Resources recently announced an agreement of acquire Parsley Energy (PE). I believe this acquisition likely will create long-term value.

To put things into perspective, the combined entity will have a total Permian inventory of 930,000 acres. Importantly, the FCF break-even (including dividends) is expected at mid-30s WTI. Therefore, even if WTI trades in the range of $40 to $50 in the coming year, the combined entity is likely to deliver healthy cash flows.

The acquisition is also positive from a balance sheet perspective. The combined entity is likely to have a leverage of 1.1. This will give the company ample financial flexibility to accelerate exploration and production programs. The company expects to deliver production growth of 5% in the near term.

PXD stock also pays an annual dividend of $2.2 and an attractive dividend yield of 2.5%. I expect dividends to increase in the coming year if WTI oil averages top $45 per barrel.

Overall, PXD stock is worth considering for dividends and for stock upside. Once the acquisition is completed, I expect the stock to trend higher.

Chevron

CVX stock (CVX) is another attractive name among energy stocks. Income investors will like CVX stock, which pays a current dividend of $5.16 and a dividend yield of 6.5%.

From a balance sheet perspective, Chevron is probably among the best names in the industry. As of Q3 2020, the company reported a net-debt-ratio of 17.5%. In addition, the company reported a cash balance of $6.9 billion.

In the upstream business, the company’s Permian asset is likely to be FCF positive for the year. Given the low break-even point for the asset, I expect robust cash flows in the coming years as oil trends higher.

Earlier this year, Chevron provided long-term guidance for investors. The company expects adjusted FCF to double by FY2024. The company also expects $75 to $80 billion in shareholder distribution over the next five years.

This would imply steady growth in dividends coupled with value creation through share repurchases. With CVX stock declining 34% in the last year, I believe it’s a good opportunity to accumulate this potential value creator.

On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

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