7 stocks to buy now for an oil rally this fall

After a long bust, energy stocks are a solid investment once more.

  • By Ian Bezek,
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Energy stocks are finally heating back up — after seven rough years for the sector, many stocks to buy are emerging again. The value of oil started to crash back in 2014, thanks to a price war among overseas producers. Natural gas had been in a steep downtrend as well. As a result, energy companies saw their profits tank for many years.

It looked like the industry was just starting to turn the corner in 2019. Then, the novel coronavirus hit and energy stocks managed to find even lower lows. Now, however, these picks are surging and appear to be entering a new bull market.

Still, many investors are ignoring the sector. And understandably so. After so many false starts, why should traders have any confidence that the industry can finally recover? Isn’t oil and gas archaic in a world that is increasingly turning to renewables?

Perhaps. However, oil has at least one more good run in it. Supply is increasingly hard to come by as governments limit new production and environmental, social and governance (ESG) activists urge companies to reduce their exploration budgets. Meanwhile, demand has come roaring back as the global economy reopens. Look at the fuel shortages in places like the United Kingdom right now, for example.

We’re already seeing a squeeze play out: natural gas hit its highest price in many years earlier this month. Meanwhile, oil has made it to $75 per barrel once again — and its trending higher. That’s fantastic news for these seven energy stocks to buy:

Exxon Mobil

Exxon Mobil (XOM) is a great place to start when it comes to energy stocks to buy. Admittedly, if you’re extremely bullish on oil and gas, XOM stock might not be the first name to pick. However, if you want a reliable blue chip with quality management and a great dividend, this company can meet your needs. XOM has one of the best 6% dividend yields on offer right now.

This company has remained an integrated producer instead of spinning off its other divisions. By holding onto its midstream and refining assets, Exxon Mobil has positioned itself to endure a long downturn in the price of oil and natural gas. In doing so, Exxon was able to maintain its dividend while bringing promising new production online from places like Guyana.

So, now that oil and especially natural gas are surging again, XOM is set to reap the rewards. Analysts have been lifting their profit outlooks for the firm and the company’s balance sheet concerns have been resolved.

All told, Exxon has been a reliable blue chip for ages. After a difficult time in the 2010s, this one is ready for a more promising decade.

Valero

Did you go on any road trips this summer? If so, you may have noticed that the price of gasoline is surging once again. Gas has topped $3 per gallon on average in the United States and is already above the $4 mark in California and Hawaii. That’s right — rising oil prices have quickly made their way to the pump.

If you want to be involved in that value chain as an investor, consider refining stocks. The industry, which has long underperformed, gained new life in the 2010s thanks to the U.S. fracking boom. This created a glut of domestic oil that allowed refiners to source cheaper inputs for their refineries.

Thanks to the fatter profit spreads, refiners like Valero (VLO) have enjoyed huge gains. Over the past decade, VLO stock has quadrupled. That leaves most of Valero’s energy peers in the dust.

Will the good times continue for the refining sector? There’s a solid chance they will. Remember, refiners don’t just produce gasoline; they also make other oil byproducts like asphalt, jet fuel and heating oil. As the economy recovers (and particularly if an infrastructure bill is approved), these byproducts should see added demand and contribute more fuel to this pick of the stocks to buy.

Canadian Natural Resources

A huge piece of the oil outlook revolves around which resources will be developed. There’s now the concept of “stranded assets,” which could be oil and gas reserves that are never tapped. Given the focus on sustainable energy and reducing emissions, it now seems likely that a fair portion of the planet’s fossil fuels reserves will never end up being utilized.

The pressure to forego resource usage is strongest in developed economies such as Europe. There, many oil and gas companies are transforming themselves into renewable energy names and rapidly divesting legacy fossil fuel assets.

This makes oil companies with already-producing assets more valuable. After all, it’s far easier for environmentalists to block new projects than stop existing operational ones. And, as far as long-life assets go, it’s hard to beat the oil sands.

Oil sands are more like mines, with producers extracting oil from heavy bituminous sands instead of using a well to pull oil deep from underground. Oil sands also don’t deplete like normal wells. They keep going until the whole field is mined out. That can take a matter of decades.

Long story short, oil sands giants like Canadian Natural Resources (CNQ) have reserves that should keep running well into the 2040s or 2050s. CNQ stock trades at less than 9 times forward earnings, offers a solid free cash flow (FCF) yield and can keep providing such numbers for many years to come. Without facing the same sort of depletion that conventional oil producers run into, this pick of the stocks to buy is set to be a huge winner in the new era of energy scarcity.

Suncor

Next up on this list of stocks to buy, Suncor (SU) has a great deal in common with Canadian Natural. Both are Canadian energy powerhouses with a huge position in the oil sands. In fact, Suncor’s corporate history is rooted in a successful Alberta-based oil sands project from back in the 1960s. Over the decades, the company has added to its expertise in this area and consolidated much of the best acreage in the oil sands regions.

Unlike Canadian Natural, however, Suncor is a more diversified business. It owns gas stations across Canada. It also owns refining capacity that gives it more control over pricing and distribution. The upside of that is that Suncor’s production is sheltered from unusually low-priced oil markets. But the flip side? As a result, SU stock may have a little less room to run than other picks in a raging oil bull market.

However, given what energy has been through over the last seven years, a lot of investors will appreciate the rock-solid nature of Suncor’s business and its built-in diversification of revenues. As its oil sands revenues should run for the decades to come, it doesn’t face problematic near-term production declines either.

Management is also buying back stock and paying a nice dividend given the company’s robust profitability. To that last point, SU is currently trading for 9.66 times forward earnings. That’s a bargain now — and will get even more compelling as oil prices rise.

ConocoPhillips

ConocoPhillips (COP) shows the other side of the refining question. The company spun off its refining business a decade ago. This left it vulnerable to lower oil prices. When the energy market tanked in 2014, the company’s cash flows dried up and it had to slash the dividend.

Although investors put ConocoPhillips in the penalty box after that, the company is now making a comeback. And unlike many peers, COP isn’t trying to reduce its exposure to oil and gas. While others are selling due to ESG mandates or shareholder activism, ConocoPhillips is a buyer.

For example, it made a huge move earlier this month; the company will be buying $9.5 billion in shale assets from Shell (RDS/A, RDS/B). Shell has been one of the firms rapidly downsizing its exposure to fossil fuels. By contrast, COP looks like it got a great deal picking up the leftovers. Enverus analyst Andrew Dittmar told Bloomberg the following:

“After waiting patiently on M&A opportunities through the land-rush years of the shale boom, Conoco has been able to pick up prime Permian real estate at what looks to be attractive price points.”

The market agrees with this take; COP stock has made new 52-week highs this week, putting it well ahead as one of the top energy stocks to buy.

Enbridge

Another set of winners from the resurgence in traditional energy sources are midstream companies. These are firms that own the pipelines, storage tanks and other logistics equipment to handle and transport oil and gas.

Most investors are probably more familiar with U.S. midstream companies like Kinder Morgan (KMI). Unfortunately, these names were largely structured in master limited partnership (MLP) set-ups that prioritized income instead of long-term sustainability. Almost all of the U.S. MLPs and midstream companies had to slash their dividends during the energy bust.

Enbridge (ENB) is a Canadian midstream player, however, that didn’t get into too much debt. As a result, ENB was able to continue rewarding its shareholders with a steady income stream while also growing the business. Shares of ENB stock have already recovered to pre-Covid-19 levels. Right now, the stock offers shareholders a 6.71% dividend yield.

Midstream players like Enbridge don’t have the same pure upside as oil and gas producers. However, the huge income stream here, combined with a little growth, can be an appealing mix. This name is definitely another pick of the energy stocks to buy.

Aspen Technology

Last up, it’s worth rounding out this list of stocks to buy with a company that’s a little different. A software firm, Aspen Technology (AZPN) isn’t in the energy industry directly, but it is strongly levered to the prosperity of the sector.

Aspen makes a software package based on industrial artificial intelligence (AI) that helps plant managers optimize their processes. Its customers come primarily from oil and gas, refining and chemicals companies. Moreover, Aspen is expanding into related fields such as wastewater management.

For now, though, Aspen is heavily tied to energy. As a result, AZPN stock has been in a bit of a slump in recent years, despite the core business continuing to grow. Still, the company has a stable recurring revenue base and many of the largest energy and refining firms as clients. Plus, in a time where emissions must be reduced, software to improve efficiency and minimize waste is vital.

Because of this, Aspen should enjoy a one-two burst of demand as energy companies enjoy higher profit margins and also deal with the call to clean up their operations. With its recent selloff, AZPN stock is trading for around 24.91 times forward earnings. That’s quite attractive for a software firm in this market.

On the date of publication, Ian Bezek held a long position in XOM, CNQ, SU, ENB and AZPN stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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