Investors have signaled their optimism, making April one of the best months in market history; the SPDR S&P 500 ETF Trust (NYSEMKT:SPY) is off only 9.3% since the beginning of 2020, even with the economy still in freefall. Oil stocks, on the other hand, continue to lag. The Energy Select Sector SPDR ETF (NYSEMKT:XLE), representing the oil and gas stocks in the S&P 500, is down more than 36%.
For many investors, this points sharply at Big Oil -- the biggest companies in the oil patch -- as being great investments as one of the few sectors that is still well below 2020 highs. The risk, of course, is mistaking size for strength; we've already seen several Big Oil companies cut their dividends, and it's entirely possible we could see one or more go bankrupt before this downturn is over.
But there are still opportunities to buy; even the best of Big Oil is still more discounted than the rest of the market, and the best-of-breed companies should prove winners once the economy and the oil sector recover. To help you identify the best picks, we asked five of our top contributors with expertise in the energy space for their top Big Oil stocks to buy and hold, and they came back with Enterprise Products Partners (NYSE:EPD), ConocoPhillips (NYSE:COP), ExxonMobil (NYSE:XOM), Total (NYSE:TOT), and Phillips 66 (NYSE:PSX).
Keep reading to find out why.
Unintentionally planning for this for quite some time
Tyler Crowe (Enterprise Products Partners): Enterprise Products Partners may not have the name recognition of other Big Oil companies, but its presence in the North American oil and gas industry is immense. The master limited partnership owns one of the largest networks of pipelines, processing facilities, and logistics assets in the U.S. and has churned out cash to investors at a steady for rate for decades. Over the past few years, though, management has been keeping its payout growth rate at a trickle because it wanted to spend on projects while also shoring up its financials. So it's pretty serendipitous that the company is possibly in the strongest financial position it has ever been in as the oil and gas market gets devastated.
In the latest earnings release, Enterprise's management said it was significantly scaling back capital spending for both 2020 and 2021. Before it made these moves, the company's cash from operations had generated $7.4 billion over the prior 12 months, compared with $4.4 billion in capital spending. Management now anticipates that its 2020 capital spending will be between $2.7 billion and $3.2 billion. These reductions coupled with a business much more insulated from commodity prices should give it the cash it needs to weather this storm and remain in decent financial shape.
It's unreasonable to expect that the company's earnings won't suffer somewhat from this downturn. Also, management will probably have to tap some short-term credit lines to keep some cash on the books. Based on its current financial position, though, it is relatively well positioned to handle a downturn and could make for an attractive income investment today.
A long-term plan to reward oil investors
Matt DiLallo (ConocoPhillips): Last year, oil giant ConocoPhillips laid out an ambitious 10-year plan designed to return cash to investors. The company's strategy put it on track to pay out $50 billion via dividends and share repurchases over the next decade if oil averaged $50 a barrel. Fueling that plan was its low-cost oil resources, which can generate a gusher of profits when oil is above $40 a barrel.
Unfortunately, the company ran into a bit of a speed bump this year because of cratering crude prices. It did temporarily suspend its share repurchase program in response so that it can maintain financial flexibility during this downturn.
However, ConocoPhillips should be able to get back on track with its plan as soon as oil prices recover. That's because it has the financial strength to get through this downturn thanks to its top-notch balance sheet backed by an $8 billion cash position and a low-cost resource base that should become a cash flow machine once again when oil prices improve. Those factors make the oil giant an ideal one to buy and hold for the long term.
History on its side
John Bromels (ExxonMobil): Most investors probably shouldn't be buying oil stocks -- even Big Oil stocks -- right now. The short-term outlook for the industry is uncertain at best, oil prices have been hitting record lows, and there's so much crude oil filling up every nook and cranny of U.S. storage that it will take months, if not years, to work through it.
The integrated majors are probably going to come out the other end of this crisis in relatively decent shape, thanks to their ability to leverage their size and their balance sheets. However, as Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) showed everyone on April 30, when it cut its dividend by 66%, even size can only take you so far.
I'm picking ExxonMobil as the top choice in a weak field. Its dividend yield is currently 7.9%, and its long history of annual dividend increases -- 37 years and counting! -- is going to encourage the company to use every means at its disposal to avoid losing that coveted Dividend Aristocrat status. If you're not a risk-tolerant investor, though, you should probably consider other options in the energy sector.
The big oil stock that's about more than oil
Travis Hoium (Total): Big oil companies have the advantage of being more diversified than many of their smaller competitors, but where they have diversification is important. For example, right now, owning a diverse set of oil production and pipeline assets may not be valuable because oil prices and consumption are down, so both businesses are struggling.
Total's diversification beyond oil exploration and production comes from both downstream distribution of oil and refined products and alternative sources of energy. The company generated 11% of revenue in 2019 from marketing and services with another 16.4% of revenue from integrated gas, renewables, and power. Renewable energy, in particular, has gotten more focus as management tries to diversify into wind and solar asset ownership and new models like electric vehicle charging stations.
Most of Total's business is still centered on the production and refining of oil, and that will be critical to its recovery. But the company has made steps to move into new forms of energy, such as renewables, and that's why I like its position among Big Oil stocks. As the energy landscape changes and oil becomes less profitable, a diversity of energy sources will serve the company well. Ironically, it's the non-oil parts of the business that makes me think this Big Oil company will outperform rivals.
The best integrated oil company to own in a downturn
Jason Hall (Phillips 66):2020 will not just be a lost year for most oil companies, but a year that moves them backwards. The companies that come through the 2020 oil crash as a going interest will, as a group, have more debt and less cash than they started with. The few that come out with less debt and more cash will be the ones that go bankrupt and wipe out shareholders. Either way, 2020 will weigh heavily on the industry, and investors, for years.
But one Big Oil stock that's built to ride out the downturn and quickly emerge a winner is Phillips 66. With no oil production, its cash flows should hold up much better than those of other majors.
For instance, the company lost $2.5 billion in Q1, because of $3 billion in non-cash impairments. Impairments like this aren't good per se -- they're a reduction in future earnings an asset was expected to produce -- but these were non-cash moves. Adjusting for the impairments, Phillips 66 earned $450 million in Q1. The big difference here is oil producers and even the integrated majors with oil production segments are facing declines in their cash flows that could prove much larger than Phillips 66 will see.
Yes, its refining, fuel marketing, and the gathering part of its midstream segment have tough times ahead as oil demand stays low. But petrochemical demand --nthink plastic containers for sanitizer and cleaning products -- is on the rise, and its natural gas midstream operations are strong and stable.
A sure sign Phillips 66 is a strong bet: The board announced on May 6 it will maintain the quarterly dividend at $0.90 per share. While many peers are slashing payouts, Phillips 66 is able to keep paying investors to hold through the downturn. Most importantly, its business is built to benefit from an economic recovery more quickly than its peers in the oil production business.