The energy industry is not for the faint of heart. With so many news stories every day about the price of oil and the wild vacillations of stock prices, it can be a place where many investors lose money hand over fist.
To successfully invest here, you have to look beyond the industry cycles and invest in great companies that have the traits to sail through both calm and rough waters. The best way to do that is to invest in those with great management teams.
If you want a few energy stocks to add to your portfolio that don't need to be monitored on a daily basis, then perhaps Total (TTE 4.35%), Helmerich & Payne (HP 14.64%), and HollyFrontier (HFC) are right for you. These three are the kinds of stocks that don't need to be babysat -- here's why.
A stable supply base
Few companies have been able to position themselves better for the upswing in oil prices than integrated oil and gas company Total. Over the past couple of years, the company has brought several of its largest production projects on line. So much so that overall production increased 14% since 2014. For an integrated oil company with 4.2 million barrels per day of oil equivalent production, that is a mighty feat.
Another thing that Total's management did during this time was sign several production sharing and commission contracts with national oil companies in the Middle East. Traditionally, Big Oil players have avoided these kinds of contracts because they tended to have low rates of return. This time around, though, Total found partners that needed the technological expertise Total could provide and was able to negotiate favorable contracts. According to CEO Patrick Pouyanne, the three contracts it signed over the past two years will provide 300,000 barrels per day of production for decades with a return on capital employed of 15% at today's prices. These kinds of low-cost, high-return projects will help support the company's capital spending and dividends for decades.
With moves like this and an integrated business model that insulates the business from the ups and downs of the oil and gas market, the company generates the best rates of return in the business today and sports a dividend yield of 5.1%. If you want a decade-long kind of investment in energy, you can't go wrong with Total today.
A steady captain on stormy seas
A part of the oil and gas industry that isn't typically conducive to sustained growth and stable stock prices are asset-heavy oil services companies such as rig owners or sand producers. As the market goes through cycles, these businesses are forced to take significant asset writedowns as their idle equipment loses value. Also, they typically carry larger debt loads to pay for the purchase of those assets.
One company that does extraordinarily well despite this harsh operating environment is Helmerich & Payne. Even against the backdrop of this industry, this company's management has been able to increase its dividend payout every year for 44 years straight. That is a lot of industry cycles to manage.
Helmerich & Payne has developed this reputation thanks to management's focus on having the best fleet of onshore rigs available, only adding rigs to its fleet when the demand is there and keeping plenty of cash on hand to pay any debts or take advantage of opportunities during the ups and downs of the industry cycle. So even though the company has lots of idle equipment and business isn't great, it is more than able to pay for its capital spending and dividends from operational cash flow.
The rig business might not instill much confidence in investors to hang on through thick and thin, but Helmerich & Payne's management have been able to make it worth an investor's while to stick around and not worry about the company over the long haul.
Turning crude oil into returns for investors
Like rig companies, oil refining is also a very cyclical business. It just happens that most of the time those cycles run in the opposite direction of oil prices. As oil prices decline, refined product margins increase while rising crude oil typically portends tough days for refiners.
Like Helmerich & Payne in the rig business, the management team at HollyFrontier is a group that has been able to rise above the fray in the refining business. Over the past couple decades, HollyFrontier has produced the best returns on capital employed in the business. It has been able to do so thanks to smart capital allocation decisions from its management team. For example, when Holly Corporation and Frontier Oil merged in 2011, it was at a time when the refining business was in a rough patch, and asset prices were depressed.
The company was able to pull a similar move several months ago when it purchased an oil lubricant manufacturing facility from Suncor Energy. At a time when investors were less enthused with the refining business, and Suncor was looking to shore up its balance sheet, HollyFrontier was able to swoop in and buy the asset for an annual EBITDA multiple (total price paid divided by annual EBITDA) of 2.9-5.8 times. That kind of smart buying is what you want in a management team handling a cyclical industry.
Oil refining is going to go through its ups and downs, but HollyFrontier's management has avoided the pitfalls of buying assets at the top of the cycle and pounced when assets are cheap. Those are the leadership qualities you want to look for in a buy-and-hold investment.