Like Fine Wines, These 4 Energy Stocks Get Better With Age

Wine and stocks aren't too different from each other. There are the "trendy" ones that will garner praise and attention until the next big thing comes along -- cough, cough, over-oaked Chardonnay and fuel cell stocks, cough. Then, there are the greats that have stood the test of time and somehow continue to get better and better. 

 

So we asked our energy analysts to dig through their "investing cellars," pull out some tasting glasses, and share with you some of their finest vintage energy stocks that you can add to your portfolio. Here's what they had to say.

Matt DiLallo: I admit, I really don't like wine. I'm told it gets better with age, but it has always tasted like sour grapes to me. On the other hand, I do have a particular fondness for oil stocks, although lately those have pushed most investors toward hard liquor. However, there are some oil stocks that do tend to get better with age.

 

One oil stock in particular that has really been ripening over the past few years is EOG Resources (EOG -0.18%). The company went from the dregs of Enron to one of the best run oil companies in America. As it aged, the company has steadily grown what matters most to investors: its cash flow, stock price, and dividends.

 

EOG data by YCharts

Jason Hall: In the movie Sideways, Miles described Cabernet Sauvignon as a "survivor," being able to grow nearly anywhere, and thrive even when neglected. These are the kinds of businesses -- especially in the energy sector -- that make some of the best long-term stocks. One of the best? Kinder Morgan (KMI -0.05%).  

 

There are three things that make Kinder Morgan the class of midstream operators, and the perfect stock to stick in the cellar and check on every few years:

• Founder-led management with a significant personal stake.
• Immense competitive advantage in its scale of pipelines and terminals.
• Protection from volatile oil and gas prices, due to its volume-driven business.

Richard Kinder has built a company of nearly 70,000 miles of pipelines, moving oil and gas from production to demand centers. Its business is based on volume, not the market price of oil or gas, and contracts can run a decade in length. Pipelines are expensive to maintain, and new pipelines cost a fortune, but these high costs also make it much harder for competitors to slice out market share. Furthermore, the demand for natural gas is going to continue growing in coming years, as industrial consumption and export capacity increase.

 

Stick Kinder Morgan in the cellar. There's a good chance it could be a "1961 Cheval Blanc" if you hold on to it long enough. 

Maxx Chatsko: NextEra Energy (NEE 0.51%) is on a remarkable run of creating shareholder value, and there is no end in sight for the renewable energy powerhouse. Since 2010 the company has increased its dividend 46% while its stock has nearly doubled -- and why not? The power generator's portfolio consists of 52% natural gas, 27% nuclear, and 16% wind, which combine to give it a carbon dioxide emissions rate that is 53% lower than the industry average. While different wine varietals work best with fluctuating levels of carbon dioxide, keeping a low carbon dioxide profile in the case of NextEra Energy will become increasingly advantageous for the company in the years ahead. When peers are looking for ways to mitigate the emissions of their portfolios to meet strict new carbon regulations -- perhaps writing off dirtier, older assets -- NextEra Energy will simply continue to invest in growth opportunities.

But, hey, it's 2015. Why own a power generator? After all, thanks to the accessibility of cheap, distributed, and renewable power generation and the growing focus on low-carbon energy, it isn't so crazy to question the role massive, centralized power plants will play in the future of energy. NextEra Energy took at big leap toward the future by acquiring the utility business of Hawaiian Electric Industries, which had struggled to cope with the large influx of customers turning to rooftop solar systems. The move allows the company to essentially use Hawaii as a sandbox for futuristic energy technologies.

Consider that investments in grid energy storage systems -- capable of smoothing out power distribution throughout the day (when the sun isn't shining) -- and in experimental microgrids are inevitable to successfully accompany rooftop solar. Once the technologies, metering systems, and responsibilities of the utility of the future are proven at scale in Hawaii and the cost of solar becomes more economical in the continental United States, NextEra Energy could roll out its blueprint to all 50 states. What's not to like about decades of growth potential?

Tyler Crowe: If we are going to make wine references here, then ExxonMobil (XOM 0.23%) is definitely a 1961 Chateau Latour. They have both stood the test of time. And -- defying traditional logic -- they both seem to get better despite so many people saying that they are past their prime. If you are looking for an investment with a shelf life that you can keep in the cellar for decades to build wealth, there are few companies that have the track record that Exxonmobil has. For over 75 years, ExxonMobil has either maintained or grown its dividend thanks to its ability to do one thing that so few other companies in the oil and gas space seem to be able to do: Generate gobs of cash flow.

XOM Cash from Operations (Annual) data by YCharts

Just like those vintage bottles of Latour or Mouton-Rothschild, very rarely are you going to find a time when you can buy shares of ExxonMobil at a steep discount. Even with the average price for a barrel of crude down almost 60% since it's high in June of last year, shares of ExxonMobil have only dropped 14% from their 2014 highs. That doesn't mean its overpriced, though, because after sitting in your investment cellar for 20 years to 30 years, it will probably look like a great addition to the stock collection.