The last six months have been a disaster for oil and gas stocks! The entire industry, as measured by the SPDR Oil & Gas Exploration and Production ETF and the SPDR Oil & Gas Equipment and Services ETF, is down more than 25% over the last half year. But that may make now the perfect time to go bargain shopping in this beaten-down sector.
We asked three of our Motley Fool contributors what energy stocks they'd recommend right now, and they all came back with companies in the oil and gas sector: Enterprise Products Partners (NYSE:EPD), Chevron (NYSE:CVX), and Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B). Here's why they think these stocks are particularly good choices today.
You could buy Enterprise anytime, but it looks great now
Tyler Crowe (Enterprise Products Partners): Enterprise Products Partners is one of those businesses where there's hardly ever a bad time to buy it. The company's management has done a splendid job over the years of steadily growing its payout -- 21 years and counting -- while maintaining a balance sheet that lets investors sleep well at night knowing a payout cut isn't coming any time soon.
One of the reasons the company looks particularly attractive right now is management's plans for the coming years. Back in 2017, the company embarked on an ambitious growth plan involving pipelines, processing facilities, and export capacity for crude oil and natural gas liquids. To fund that growth, it elected to retain more cash from operations and internally fund it rather than have to go to the equity market with new shares.
For some, the tepid payout growth during this period was unappealing, and now Enterprise's stock has a distribution yield of 6.3%. The company is coming toward the end of this major investment push, though, and now it is looking to boost shareholder returns with buybacks.
Enterprise expects to bring five major capital projects into service in 2019. Adding these new assets will bring lots more cash in the door while also reducing capital spending obligations. This one-two punch should free up loads of cash for management to pursue several opportunities, whether for more growth, higher payouts, or even buying back stock. That makes this "buy at any time" stock especially compelling today.
This stock boasts a rarity in oil & gas -- strong free cash flow
Rich Smith (Chevron): Asked to name a "top oil stock" to outperform the market in January, I alighted upon Chevron, impressed by the stock's at-the-time uniquely strong free cash flows, which were actually greater than its reported net income. Since I made that call, Chevron stock has outperformed handily, delivering an 11% return to stockholders in less than two months' time -- so I'm doubling down.
Today I pick Chevron, this time as a top energy stock to buy right now, but for much the same reasons as I cited last time.
Since reporting Q4 results earlier this month, Chevron's actual free cash flow of $16.8 billion has widened its lead over the company's reported net earnings. With only $14.8 billion in reported income for 2018, Chevron now generates $2 billion more cash profit than it claims as GAAP profit -- a 13.5% "gap," if you will, between reported and actual profitability. Thus, even at a now-greater market capitalization of $227.3 billion, Chevron looks like a bargain to me at a valuation of just 13.5x FCF.
Am I concerned that analysts polled by S&P Global Market Intelligence predict declining earnings for Chevron this year? Not really. Rather, I'm encouraged by the fact that these same analysts see Chevron's cash profits growing strongly over the next few years, from $16.8 billion in FCF generated in 2018 to $17.2 billion this year, $17.5 billion next year, and, perhaps...$32.6 billion in 2023.
If Chevron gets anywhere near this mark, I expect it to outperform the stock market by a large margin.
This year's stock at last year's prices
John Bromels (Royal Dutch Shell): If you told me that only one of the big oil majors -- the massive integrated oil and gas companies that dominate the industry -- was trading at a lower price today than it was a year ago, I'd probably have thought it was recent underperformer ExxonMobil. I might have guessed French company Total. But there's no way I would have pegged Royal Dutch Shell.
And yet it's true: All the oil majors have seen their share prices increase over the last year, either a little (Total's 1.2% increase) or a lot (Chevron's 9.6% gain), except Shell, whose shares were down 1.7%. I was also surprised to discover that Shell is the worst performer over the last five years, too, with shares down 18.6% from their March 2014 prices.
And yet Shell has been posting incredibly impressive numbers recently. Thanks in part to higher natural gas prices, Shell's Q4 2018 revenue was up 18.7% year over year. Net earnings were up an astonishing 46.7% year over year. And operating cash flow was up a jaw-dropping 202.2% year over year. And yet the stock is trading lower? With numbers like those, you can see why today's share price doesn't seem to make sense.
But even if Shell's share price doesn't rocket ahead immediately, it offers a best-in-class dividend yielding about 5.9%, which will help encourage shareholders to bide their time. Now is a great time to consider buying this solid stock at last year's price.