Investors have expressed optimism, making April one of the best months in market history; the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) is down only 9.3% since the start of 2020, even with an economy still plummeting. Oil stocks, on the other hand, continue to lag. the Energy Select Sector SPDR ETF (NYSEMKT: XLE), representing oil and gas stocks S&P 500, is down more than 36%.
For many investors, this clearly indicates that Big Oil – the largest companies in the oil sector – is an important investment as one of the few sectors still far below the peaks of 2020. The risk, of course, is to confuse size and resistance; we have already seen several large oil companies reduce their dividends, and it is quite possible that we could see one or more bankruptcies before the end of this slowdown.
But there are still buying opportunities; even the best of Big Oil is even more up-to-date than the rest of the market, and the best-performing companies should be the winners once the economy and the oil sector recover. To help you identify the best choices, we asked five of our top contributors with energy expertise that their main Big Oil stocks buy and hold, and they came back with Corporate Product Partners (NYSE: EPD), ConocoPhillips (NYSE: COP), ExxonMobil (NYSE: XOM), Total (NYSE: EARLY), and Phillips 66 (NYSE: PSX).
Read on to find out why.
Unintentionally planning this for a while
Tyler Crowe (Enterprise Products Partners): Enterprise Products Partners may not have the name of other major oil companies, but its presence in the North American oil and gas industry is immense. The Master Partnership has one of the largest networks of pipelines, processing facilities and logistics assets in the United States and has been distributing liquidity to investors at a constant rate for decades. In recent years, however, management has kept its rate of payment growth at a net because it wanted to spend on projects while strengthening its finances. So it’s good enough that the company is probably in the strongest financial position it’s ever known in a devastated oil and gas market.
In the latest release of results, Enterprise management said it was cutting capital spending significantly for 2020 and 2021. Before making these changes, the company’s operating cash flow had generated $ 7.4 billion dollars in the previous 12 months, compared to $ 4.4 billion in capital expenditures. . Management now predicts that its capital spending in 2020 will be between $ 2.7 and $ 3.2 billion. These reductions coupled with much more isolated activity in commodity prices should give it the liquidity it needs to weather this storm and remain in good financial health.
It is unreasonable to expect that corporate profits will not suffer somewhat from this slowdown. In addition, management may need to use certain short-term lines of credit to keep money on the books. However, given its current financial situation, it is relatively well placed to weather a downturn and could be an attractive income investment today.
Long-term plan to reward oil investors
Matt DiLallo (ConocoPhillips): Oil giant ConocoPhillips last year presented an ambitious 10-year plan to return money to investors. The company’s strategy set him on the right track for pay $ 50 billion via dividends and share buybacks over the next decade if oil averaged $ 50 a barrel. This plan was fueled by its low-cost oil resources, which can generate a gusher of profits when oil exceeds $ 40 a barrel.
Unfortunately, the company has experienced a bit of a slowdown this year due to the craterization of crude prices. It made temporarily suspend its share buyback program in response so that he can maintain his financial flexibility during this downturn.
However, ConocoPhillips should be able to get back on track with its plan as soon as oil prices recover. Indeed, it has the financial strength to weather this slowdown thanks to its first-rate balance sheet supported by $ 8 billion in cash and a low-cost resource base that should once again become a cash flow machine when oil prices will improve. These factors make the oil giant an ideal to buy and keep for the long term.
History for its part
John Bromels (ExxonMobil): Most investors are unlikely to buy oil stocks – even Big Oil stocks – yet. The near-term outlook for the industry is uncertain at best, oil prices have hit record lows and there is so much crude oil filling every nook and cranny of US storage that it will take months or even years to get there. .
The integrated majors are likely to come out of this crisis at the other end in a relatively decent shape, thanks to their ability to take advantage of their size and balance sheets. However, as Royal Dutch Shell (NYSE: RDS.A)(NYSE: RDS.B) everyone showed on April 30, when he cut his dividend by 66%, even the size can only get you there.
I choose ExxonMobil as the first choice in a weak area. Its dividend yield is currently 7.9% and its long history of annual dividends is increasing – 37 years and more! – will encourage the company to use all the means at its disposal to avoid losing this coveted aristocratic dividend status. If you are not a risk tolerant investor, you should probably consider other options in the energy sector.
The big oil stock is more than oil
Travis Hoium (Total): Big oil companies have the advantage of being more diversified than many of their smaller competitors, but where they have diversification is important. For example, at present, having a diverse set of oil producing assets and pipelines may not be useful because oil prices and consumption are falling, so both companies are in trouble .
Total’s diversification beyond oil exploration and production comes from both the downstream distribution of oil and refined products and alternative energy sources. The company generated 11% of its revenue in 2019 from marketing and services, and 16.4% from additional revenue from integrated gas, renewable energy and electricity. Renewable energies in particular have become more targeted as management tries to diversify into ownership of wind and solar assets and new models such as charging stations for electric vehicles.
Most of Total’s activities continue to focus on oil production and refining, which will be essential to its recovery. But the company has taken steps to switch to new forms of energy, such as renewable energy, and that’s why I like its position among the Big Oil stocks. As the energy landscape changes and oil becomes less profitable, a variety of energy sources will serve the business well. Ironically, it is the non-oil parts of the business that make me think that this big oil company will outperform its rivals.
The best integrated oil company to own in a downturn
Jason Hall (Phillips 66): 2020 will not only be a lost year for most oil companies, but a year that will make them go backwards. Companies that survive the 2020 oil crash as interest will, as a group, have more debt and less cash than they originally did. The few who will come out with less debt and more money will be those who go bankrupt and wipe out shareholders. Either way, 2020 will weigh heavily on the industry and investors for years to come.
But a Big Oil stock that is built to weather the downturn and get out of it quickly is Phillips 66. In the absence of oil production, its cash flow should be much better than that of other majors.
For example, the company lost $ 2.5 billion in the first quarter due to $ 3 billion in non-cash impairments. Impairments like this are not good in itself – it is a reduction in the future profits that an asset had to produce – but it is a non-monetary movement. After adjusting for impairments, Phillips 66 earned $ 450 million in the first quarter. The big difference here is the oil producers and even the majors integrated with oil production segments face a drop in their cash flow which could turn out to be much larger than Phillips 66 will see.
Yes, its refining, its marketing of fuel and the collection part of its median segment have difficult times ahead because the demand for oil remains weak. But petrochemical demand – think of plastic containers for sanitation and cleaning products – is increasing, and its intermediate natural gas activities are strong and stable.
A sure sign that Phillips 66 is a strong bet: the board of directors announced on May 6 that it would maintain the quarterly dividend at $ 0.90 per share. While many peers are cutting payments, Phillips 66 is able to keep paying investors to weather the downturn. More importantly, his business is designed to benefit from an economic recovery faster than its peers in the oil production sector.