As easy as it sounds, it is quite difficult to follow the 'buy low, sell high' idea. It's tough to go against the collective wisdom of investors who don't like a sector or stock. This is the case with energy stocks currently, which are down now for more than a couple of years. The sustained weakness in energy stock prices has understandably frustrated even the most optimistic investors.
However, as oil and gas supply and demand come in sync, companies deliver consistently in the new environment, and the sector comes out of the current price cycle, investors' interest in the sector should rise. Admittedly, this isn't happening soon. On the contrary, effects of coronavirus and warmer weather are expected to negatively impact oil demand in the first quarter of 2020. Not a good news for oil companies which already posted dismal fourth-quarter performance. The negative near-term outlook has pressured energy stocks further, making them more attractive. Savvy investors who recognize this opportunity should eventually be rewarded.
In such a scenario, it is important to select the best performers, which can grow irrespective of oil prices. Three energy stocks -- ExxonMobil (NYSE:XOM), ConocoPhillips (NYSE:COP), and Enbridge (NYSE:ENB) -- are among the best to take advantage of the current disconnect between the company's fundamentals and its stock price. Each of these stocks offer attractive yields, so you are not just simply waiting for improved industry fundamentals to get your returns.
ExxonMobil: the largest oil producer in the US
Several factors make ExxonMobil a top bet in the energy sector. A large and diversified asset base places ExxonMobil in a strong position even when the industry trends aren't supportive. In fact, its scale allows it to make investments through the commodity price cycle when others cannot. Even though ExxonMobil's debt rose a bit recently, the company's leverage is very conservative.
ExxonMobil's higher production, contributed from its recent investments, should translate into improved top and bottom line growth in the years to come. While Exxon's high investments look like a risky bet, the company's strategy is indeed quite sound. The company is making investments where it hopes to generate higher returns, while divesting assets that are not contributing much to its cash flows. This two-pronged approach should help ExxonMobil grow its earnings while keeping costs under control.
Finally, the recent fall in ExxonMobil's stock price has made its yield very attractive. More importantly, given the company's track record of dividend growth, as well as its potential free cash flow growth, the yield looks pretty safe. ExxonMobil's more than 5% yield makes up for the time spent waiting for the stock to turn around.
ConocoPhillips is one of the few US oil and gas producers which have come out of the oil price crisis stronger. The company has transformed itself in the three years from 2016, when it had to slash its dividends. It has generated lots of free cash in the last couple of years. Further, it intends to keep returning this to its shareholders. ConocoPhillips' ability to grow cash even in the current price environment is remarkable, more so because very few others have been able to do so. The single largest factor that enabled ConocoPhillips to achieve this feat is its low cost of supply. A significant chunk of the company's oil and gas resources has an average cost of supply of less than $40 per barrel. Moreover, the company is adding only those resources which have development costs below $40 per barrel.
Strong output in the Bakken, Eagle Ford, and Permian Basin has significantly contributed to ConocoPhillips production growth in recent years. Additionally, the company expects production to remain robust in 2020. That should continue to fuel its dividend growth.
Enbridge stock has fared better than ExxonMobil and ConocoPhillips in the last couple of years. Consistent earnings and dividend growth, even during oil price turmoil, likely explains Enbridge's superior performance. Higher volumes on Enbridge's liquids and gas pipelines, significantly contributed by Spectra Energy acquisition, drove its recent earnings growth. What's more, Enbridge expects a long-term annual per share distributable cash flow growth of 5%-7%. Enbridge's pipeline of secured capital projects should drive this growth. Considering positive natural gas demand outlook, the company's increased gas operations following the Spectra Energy acquisition should contribute to the growth.
Enbridge's strong earnings get reflected in the company's solid dividend growth. Higher earnings have also helped Enbridge in bringing down its debt-to-EBITDA ratio within its target range of 4.5 times to 5 times. All these factors make Enbridge's yield of about 5.7% very attractive.