The energy sector got more tricks than treats in October, thanks to falling oil prices and a broader stock market downturn. But that may make November the perfect time to scoop up shares of some of these companies.
We asked three top Motley Fool contributors what energy stocks they think are good buys this month. They came back with Plains All American Pipeline (PAA -0.39%), TerraForm Power (TERP), and ConocoPhillips (COP -2.87%). Here's why they think these companies have a shot to outperform over the long haul.
On sale after an October swoon
Matt DiLallo (Plains All American Pipeline): Oil pipeline company Plains All American Pipeline got caught in the undertow of October's market swoon, which drove the value of the master limited partnership (MLP) down 16%. That sell-off looks like an excellent opportunity for investors to scoop up this high-yielding pipeline company at an even better price.
Plains All American Pipeline is in the right spot at the right time. The company operates an unmatched network of oil midstream assets in the fast-growing Permian Basin, which is in desperate need of new pipeline capacity. Because of that, Plains has been able to lock up several expansion projects, which position the company to grow its earnings by about 14% this year and another 14% to 15% in 2019. Meanwhile, with an excellent strategic footprint in the region, it's well positioned to continue expanding at a healthy clip in the future.
That growth should enable Plains All American Pipeline to increase its already attractive 5.4% yielding distribution to investors at a meaningful rate in the future. While the company currently has distribution growth on hold so that it can fund expansion projects and improve its balance sheet, it expects to hit its leverage target early next year, and then start ramping up shareholder distributions.
Plains All American Pipeline was already a compelling investment opportunity given its strong footprint in the Permian, improving financials, high yield, and visible near-term growth. However, after selling off last month for no reason, investors can now get Plains for a much cheaper value, which makes it among the top energy stocks to buy in November.
A new breed of energy stock
Travis Hoium (TerraForm Power): The energy industry is going through a number of transitions that will likely change the industry forever. Demand for electricity is slowing as homes and appliances get more efficient; electric vehicles are growing as a percentage of vehicles sold, which will upend fossil fuels; and the idea of storing energy is starting to go mainstream. One company that's taking advantage of the industry's trends is yieldco TerraForm Power, owner of wind and solar assets that have long-term contracts to sell electricity to utilities.
TerraForm Power is in a growing section of the energy industry, owning renewable energy assets. The company is riding the falling cost of renewable energy to take market share from fossil fuels and generate a return for shareholders. Its long-term contracts make cash flows predictable for decades to come, ensuring that investors get a return on investment.
As it stands today, TerraForm Power pays out 80% to 85% of its excess cash flow as a dividend, currently resulting in a payout of $0.76 per share in 2018. Management says there's even a "clear path to deliver annual dividend per share growth of 5% to 8% through 2022" by controlling costs and maximizing existing revenue opportunities. If true, the current yield of 6.7% could become an effective yield of 10.6% in 2022 for investors who buy and hold the stock.
With all of the changes taking place in energy, I think investors should be looking for stocks that have long-term stability built into their operations. TerraForm Power's average of 14 years remaining on power purchase agreements with utilities ensure long-term cash flows and a strong dividend yield. In an uncertain industry, that's the kind of stock I would bet on today.
A beaten-down moneymaker
John Bromels (ConocoPhillips): Since the price of oil started to rise in late 2017, oil and gas producers like ConocoPhillips have been having a field day. The effort they put into reducing costs during the price downturn is now paying off in the form of higher margins and improved cash flow.
As the largest independent U.S. oil and gas exploration and production company, Conoco was one of the companies hit hardest by the price downturn, but has also perhaps come the furthest in transforming its operations. By selling off underperforming assets in Canada and elsewhere, and knocking its cost of supply down to $35 per barrel, current oil prices -- above $60 per barrel -- have helped Conoco come roaring back. In fact, on the most recent quarterly earnings call, CEO Ryan Lance boasted that the company's earnings were as high as they had been in 2014, when oil prices were above $100 per barrel.
Conoco has been using the proceeds from its newfound success to pay down debt, buy back shares, and start raising its dividend, which it slashed in 2016. The market had already begun to take notice, bidding shares higher over the past year. But with October's share price drop, the company is now trading at a P/E of 13.5, lower than most of its peers in the oil patch. That makes November a great time to pick up shares of a more efficient, more valuable company.