Energy stocks faced many challenges in 2019 as demand declined, trade concerns impacted the markets and volatility continued in crude oil prices.
Investors are starving for income and value stocks in the energy sector are an option. The dividend yield on the energy sector is approximately 1.5 times the 1.9% dividend yield on the S&P 500 (.SPX), says Rob Thummel, a portfolio manager at Tortoise Capital.
Value stocks tend to trade at a lower market multiple than a growth stock and often generate a dividend, says Ron McCoy, CEO of Freedom Capital Advisors.
These are the best energy stocks to buy for value investors:
- Exxon Mobil Corp. (XOM)
- Enterprise Products Partners (EPD)
- Williams Companies (WMB)
- Suncor Energy (SU)
- Pioneer Natural Resources Co. (PXD)
- BP (BP)
Exxon Mobil, the energy behemoth, offers “great value for just about any investor looking for some dividend income,” McCoy says. The stock reacted to lower oil prices and fell from its high of $83.75.
“Investors who are patient can accumulate the stock at the $70 level like I have been and reinvest the 5% dividend every quarter to add to their shares,” McCoy says. “Trading at 15 times forward earnings, we believe the stock offers value.”
Exxon Mobil is also a large producer in natural gas, which is a cleaner fossil fuel whose usage is expected to increase globally.
“In a volatile market, investors can shift some of their holdings to value names if they want to lessen some of their volatility," McCoy says.
Enterprise Products Partners
Enterprise Products Partners is a Houston-based midstream natural gas and crude oil pipeline company with processing plants and marine terminals.
The company generates a larger dividend yield of 6.4% and conducts almost one-third of all U.S. crude oil exports.
Enterprise Products Partners not only has 20 years of consecutive distribution increases, the company operates a diversified network of critical energy infrastructure assets that benefit from rising U.S. exports of crude oil, natural gas, and natural gas liquids, Thummel says.
Investors are demanding that management teams in the energy sector prove that they operate good businesses by generating significant free cash flow, he says.
“Value energy stocks are in the early stages of generating significant free cash flow,” Thummel says.
The Williams Companies generates a dividend yield of 6.6% and operates some of the most important natural gas pipeline assets in the U.S., Thummel says.
“Energy infrastructure stocks are value energy stocks and they offer high current income and trade at multiples that are significantly lower than historical norms,” he says.
Williams and other midstream companies are well-positioned to outperform because the U.S. is now a net exporter of oil. Yields on midstream companies tends to be higher than other energy companies, says Kostya Etus, a portfolio manager of CLS Investments. “This not only creates more stability of share prices but also can boost demand in low-interest rate environments,” he says.
Suncor Energy, a Canadian integrated energy company, is nicely positioned within the oil and gas sector, says Michael Underhill, chief investment officer at Capital Innovations in Wisconsin. The company has three core businesses that can generate substantial free cash flow over a wide range of oil prices.
Suncor has generated more than $2 billion in surplus cash flow year-to-date and has returned $1.3 billion in dividends and $1.1 billion in share buybacks.
“It has a good combination of organic production growth opportunities while generating free cash to fund shareholder friendly actions,” he says.
The shares of the company have rebounded from a low of $25.81 and boasts a dividend yield of 4.1%.
Pioneer Natural Resources
Pioneer Natural Resources is a low cost and disciplined operator in the Permian Basin, selling at a material discount to net asset value. The company can generate profitable, above average production growth with oil in the $50 to $55 range, Underhill says.
Additional consolidation is needed in the Permian as companies move from exploration to production mode, he says. Pioneer Natural Resources stands out as high quality asset in the Permian. While Chevron Corp. (CVX) walked away from Anadarko Petroleum earlier this year, the company may still be in the market for Permian assets to build up their critical mass.
Pioneer generates a 1.4% dividend yield.
BP, the British oil company, will deliver some of the most attractive production growth while free cash flow expands to fund more shareholder-friendly actions, Underhill says.
The company anticipates it will divest $10 billion in assets by 2020 to strengthen its balance sheet after buying US onshore assets for $10.25 billion in 2018 from BHP. In August, BP announced that it was selling its Alaskan North Slope assets to Hilcorp Alaska for $5.6 billion. The cash payments from the 2010 Deepwater Horizon oil spill will end by 2020.
“BP’s stock is selling at a discount to peers on a debt adjusted EV/EBITDA basis and is providing a 6.4% current yield,” he says.
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