The COVID-19 pandemic, along with Saudi Arabia and Russia's war for global market share dominance, has brought much of the oil industry to its knees. We've already seen some companies go bankrupt just a couple of months into the downturn, and more bankruptcies are on the way as the supply-and-demand imbalance gets even worse with each passing day. That makes much of the oil patch a minefield for investors to avoid.
But even within this minefield there are a core group of well-capitalized and diversified companies that have both the operations and balance sheet strength to navigate the epic downturn. Four Motley Fool energy experts contributed a top oil stock that looks worth buying now: French energy giant Total SA (TTE 1.08%), refining and midstream leader Phillips 66 (PSX 1.89%), dominant and well-built oil and gas giant ConocoPhillips (COP 3.24%), and midstream stalwart Magellan Midstream Partners (MMP 2.14%). Keep reading to learn what sets these four oil stocks apart from most of the rest of the industry right now.
Integrated model and low North American exposure
Tyler Crowe (Total SA): There are three appealing qualities for Total today compared to most other companies in the oil and gas industry:
- Its integrated business model means it can generate some revenue from downstream operations and other venues as its exploration and production business suffers.
- It has low exposure to North American oil production where prices are even worse than the international market.
- It has lots of cash on the books and has already eliminated $5 billion in cash expenses for the year.
Oil prices are so low these days that no company can produce oil and profits simultaneously. That is even worse in North America, where spot prices for certain crudes such as West Texas Intermediate and Western Canadian Select are priced much lower than the international benchmark, Brent. Of the oil majors, Total has the least exposure to North America, so its price realizations will likely be better than most.
Also, with a highly profitable refining and retail segment as well as a significant contribution from its integrated gas, renewables, and power segments, Total's chances of avoiding taking on significant debt to get through this are much lower than others in this industry.
This isn't to say that Total will come out of this downturn unscathed, but the damage will likely be lower than others and could make it one of the better bets on the oil and gas industry today.
Big enough, strong enough
John Bromels (Phillips 66): Refiners are somewhat insulated from low crude oil prices because they make their money off the "crack spread" -- the difference between the cost of crude oil and the selling prices of the refined products and petrochemicals made from it. Unfortunately, there's a lack of demand for refined products like gasoline right now, and that has sent shares of refiner and marketer Phillips 66 down 33.8%.
With a glut of crude oil on the market in the U.S. and limited storage, oil prices are likely to stay low even after drivers start returning to the roads, increasing demand for refined gasoline. That should drive higher margins at Phillips 66's refineries while low gas prices simultaneously increase traffic to its filling stations. Phillips 66's size, strong balance sheet, and $1.6 billion cash hoard should ensure it can survive until that point.
The oil industry is a dangerous place these days, but Phillips 66 is one of the surest bets in the sector.
Built for times like these
Matt DiLallo (ConocoPhillips): ConocoPhillips learned some valuable lessons during the last oil market downturn, which are paying dividends this time around. That experience had the oil giant put a priority on increasing its flexibility -- both operationally and financially -- so that it can quickly adjust to changes in market conditions.
One of the most important things it did was to build a fortresslike balance sheet. ConocoPhillips entered this currently turbulent period with the second-lowest leverage ratio in its peer group and a mountain of cash on its balance sheet. That has given it the financial flexibility to maintain its dividend. Meanwhile, it has focused on operating assets that not only boast some of the lowest supply costs in the sector but are flexible enough that it can adjust on the fly. That's allowed it to quickly reduce spending and production so that it can save that low-cost oil for better market conditions.
ConocoPhillips' flexibility will also allow it to move quickly when market conditions improve. It can turn wells back on and ramp up its drilling program. On top of that, it could potentially take advantage of opportunities that arise to bolster its portfolio via acquisition. This unparalleled flexibility puts it in an elite class.
A well-structured infrastructure giant
Jason Hall (Magellan Midstream): If independent oil producers are the most at-risk from the oil crash, then top midstream companies are probably the safest. In this segment, Magellan is one of the very best. Magellan owns pipelines and storage facilities that are critical in the logistics of crude oil and refined products.
On one hand, now isn't a great time to be in the business of moving crude oil or refined products in North America. There is an overabundance of crude oil, but with gasoline demand at Vietnam War-era levels right now, Magellan's cash flows will feel a pinch. A protracted downturn would have a bigger impact on its bottom line than many expect, forcing the giant to tap more debt for cash to fund its distribution, or even back down from its plan to keep paying investors through the downturn. That's the downside case.
The upside from here is that, while oil production will be the last segment to benefit from a recovery of economic activity, supplying refined products should prove one of the first. That's excellent news for Magellan, which counts on the refined products business for the majority of its operating profits.
Between the diversity in its business that should prove helpful in weathering the storm and a balance sheet that gives it plenty of room to navigate the downturn and continue paying a dividend yield that's above 10% right now, Magellan Midstream looks buy-worthy today.