There are a number of opportunities and pitfalls in the energy industry today, no matter where you're looking. Not only are oil prices all over the map, but the electric grid is changing more rapidly than it has since its invention.
We asked three of our Motley Fool contributors for a stock pick for investors looking to jump into energy stocks, and Eni S.p.A. (NYSE:E), MPLX (NYSE:MPLX), and TerraForm Power (NASDAQ:TERP) made the list for very different reasons. Here's why they like each stock today.
America and China are in a trade war, but you don't have to participate
Rich Smith (Eni S.p.A.): As my esteemed fellow Fool Matt DiLallo recently pointed out, energy stocks are tumbling this week in response to a despondent U.S. Energy Information Administration update advising that oil stockpiles in the U.S. shot up by 6.8 million barrels last week -- rather than falling the 900,000 barrels they were expected to fall. West Texas Intermediate crude prices are down below $52 a barrel and, as Matt also points out, "this unexpected inventory buildup seems to confirm the oil market's fears that the trade war between the U.S. and China is negatively impacting oil demand."
Which gets me to thinking: Perhaps now would be a good time to look at an energy stock that's neither American nor Chinese.
My vote to sidestep the U.S.-China trade kerfuffle therefore goes to Italy's Eni. It's a sizable mid-tier oil company with a $56.2 billion market cap, $4.8 billion in trailing net income, and even better $5.7 billion free cash flow -- thus trading for only 11.7 times earnings and a mere 9.9 times cash profit.
Plus, with $19.4 billion in cash on its balance sheet (admittedly, versus $35.5 billion in debt), Eni has plenty of cash on hand to take advantage of any acquisition opportunities emerging if weaker, less-cash-rich players can't earn a living in a world of cheaper oil prices and begin to fall by the wayside.
I think Eni could be a fine oil stock to buy in June.
Even more attractive after its needle-moving acquisition
Matt DiLallo (MPLX): MPLX recently agreed to acquire its sibling Andeavor Logistics in a $14 billion deal. The transaction makes lots of sense because it will not only increase MPLX's cash flow, but also enhance its growth prospects. That makes MPLX an even more attractive investment opportunity this month.
One of the most immediate benefits of the deal is that it will improve the sustainability of MPLX's 8.6%-yielding distribution. That's because the pro forma company expects to produce $4.1 billion of cash flow this year, which is enough to cover that payout by a very comfortable 1.4 times. That will enable the company to generate even more excess cash that it can invest in growth projects.
The other notable aspect of this deal is the strategic benefits. One of the biggest is in the Permian Basin, where MPLX will be able to use Andeavor's Conan oil gathering system to provide volumes for its planned oil pipeline projects to the Gulf Coast, where it's also investing in oil export capacity. That will help MPLX build out a large-scale "wellhead-to-water" system where it can transport production from the Permian to export facilities along the coast. This integrated system will not only enable MPLX to make money across the entire midstream value chain, but it will give MPLX a strategic advantage over rivals in securing new expansion projects.
The market doesn't seem to appreciate the strategic and financial benefits of this deal, given that units of MPLX sold off by about 5% last month. That decline, however, makes the master limited partnership an even more attractive investment opportunity this June, since it now trades at a lower valuation and higher yield.
A high-yield energy stock
Travis Hoium (TerraForm Power): The energy industry is being disrupted in a number of ways, from renewable energy being added to the electric grid to electric vehicles competing with traditional oil-powered modes of transportation. Investors need to keep those trends in mind when investing in energy today.
One company I think that's well-positioned in a changing energy industry is TerraForm Power, owner of wind and solar projects that are backed by long-term contracts to sell electricity to utilities. Those contracts result in predictable cash flow, allowing a yieldco like TerraForm Power to act more like a bond for investors than a risky stock.
TerraForm's management says it has 13 years of contracted cash flows, and 16% of its assets have contracts that extend 20 years or more. And 80% to 85% of the resulting cash flow available for distribution is paid out to investors, with the remaining being held to fund long-term dividend growth. That dividend is expected to be $0.8056 per share this year, a yield of 5.7% at today's stock price.
Under the leadership of majority owner Brookfield Asset Management, TerraForm Power has regained the market's confidence after a rocky road in 2015 and 2016. It has highly predictable cash flows and the ability to grow its dividend with the cash it's retaining from operations. In an unpredictable energy landscape, that's a valuable place for an energy company to be today.
Great ways to play energy in June
Whether you're looking at oil stocks or renewable energy, these picks have something for everyone. One common thread is high dividend yields, which each of these stocks has for investors. In a bumpy energy industry, that's something investors should enjoy being able to fall back on.