Oil and natural gas prices have been falling recently, but that doesn't mean now is a bad time to invest in companies that produce those commodities. The companies themselves look pretty healthy as they're raking in money from oil and gas prices that remain elevated by historical standards. Plus, the bankruptcies of the pandemic weeded out weak companies. Although widespread renewable energy is on the horizon, electrical grids and the transportation industry will continue to rely on petroleum for some time. That's especially true for natural gas, which burns cleaner than coal and is seen as a bridge fuel to renewable energy. "To paraphrase Mark Twain, 'The reports of the death of fossil fuel companies are greatly exaggerated,'" says Robert Johnson, finance professor with Creighton University.
Occidental Petroleum Corp.
There's something to be said when one of the most famous investors of all time still has oil and gas holdings in his portfolio. Warren Buffett, through Berkshire Hathaway (BRK/A, BRK/B), has been amassing shares of Occidental Petroleum (OXY), and now owns more than 20% of the company. Berkshire even has regulatory permission to buy up to half of Occidental's shares. "Buffett is a long-term investor and a willing buyer," Johnson says. "His stake in OXY serves as both an indication of the long-term value of the firm and also provides price support, as Buffett will likely increase his stake on any weakness. Historically, investing with Warren Buffett has provided tremendous returns." Occidental also has an attractive trailing-12-month price-to-earnings ratio of 6.4.
As the world shifts toward renewable energy, so is this European integrated oil and gas supermajor, to use a term given to publicly traded Big Oil companies that aren't owned by governments. The company changed its name last year from Total to reflect a broadening portfolio of energy generation, including developing large solar and wind farms. "TotalEnergies (TTE) is becoming a sustainable multi-energy company, as management is investing to become one of the top five producers of renewables," says Emily Cozad, portfolio manager with Buckingham Advisors. The company forecasts oil demand will plateau and decline from 2030 onward, but in the meantime, Cozad points out that TotalEnergies is a low-cost oil producer. That makes the company a bet on both the short-term and long-term energy outlooks. "Valuation is attractive, as the stock is selling at more of a discount to the sector than usual," Cozad says.
In the world of integrated oil and gas producers, Rob Thummel, senior portfolio manager at TortoiseEcofin, likes Chevron (CVX). The company is "focused on delivering more energy and less emissions by expanding business beyond traditional oil and gas, investing in renewable diesel and renewable natural gas," he says. In June, Chevron acquired Renewable Energy Group, combining that company's renewable fuels production capabilities with Chevron's manufacturing, distribution and commercial marketing position. "This acquisition fuels the expansion of our renewable fuels business and aims to help provide lower-carbon solutions for the transportation sector," the company said. "Chevron Renewable Energy Group will help us grow our renewable fuels production capacity to 100,000 barrels per day by 2030."
Reasons to invest in the energy sector include significant free cash flow yields, high dividend yields and stocks that act as an inflation hedge, says Thummel. With global natural gas and oil inventories low, he expects prices for those commodities to remain elevated into next year, with U.S. oil prices hovering around $100 per barrel through 2023. U.S. natural gas prices will range around $6 to $7 per thousand cubic feet in 2023, he expects. That's lower than current levels but elevated related to historical levels, he says. One U.S. natural gas value chain stock that is contributing to global decarbonization and enhancing global energy security is EQT Corp. (EQT), Thummel says. He expects EQT, the largest natural gas producer in the United States, to increase free cash flow and earnings before interest, taxes, depreciation and amortization, or EBITDA, by 50% next year as lower-price natural gas hedges expire.
Kinder Morgan Inc.
Another natural gas player Thummel points to is Kinder Morgan (KMI). This pipeline operator is tied to growth in demand for more liquefied natural gas, or LNG, from the United States, he says. "Energy security concerns and a move away from Russian natural gas is driving growth in natural gas needed for new LNG plants in the Gulf Coast region," Fitch Ratings said in a July note. "KMI serves about 50% of the LNG facilities in the Gulf Coast and is well placed to provide additional service, driving capex higher, following a period of reduced spending during 2020-2021."
Pioneer Natural Resources Co.
The Permian Basin is a fossil fuel-producing area in Texas and New Mexico with expansion potential. Among the oil value chain companies with operations there, Thummel likes Pioneer Natural Resources (PXD). The company has a robust inventory of drilling opportunities in the Permian, and it has been returning significant amounts of cash flow to shareholders, Thummel points out. The company has a trailing annual dividend yield of 7.2%, and it's paying a special dividend in the third quarter. During the second quarter, the company had free cash flow of $2.7 billion and returned more than 95% of it to shareholders through its dividend. It also bought back $750 million of its shares during the quarter. That continues a widespread trend among oil and gas companies of spending free cash flow on dividends and buybacks rather than exploration. That's one reason oil prices have remained elevated.
Benjamin Halliburton, chief investment officer with Building Benjamins, says the big dividends from the energy sector are likely to be sustainable. "Unlike previous upticks in oil prices, these companies are not increasing capital spending and thus production," he says. "They are instead rewarding shareholders with dividends by paying out huge numbers from their free cash." Ovintiv (OVV) has increased its dividend by more than 40% from where it was at the end of last year. The company is yielding 1.96%, which is not huge compared with other companies in the sector, but Ovintiv is also aggressively paying down debt and has been spending to increase well efficiency.
|For more news you can use to help guide your financial life, visit our Insights page.|