Oil prices have rebounded since the bottom in late April, when U.S. crude futures actually went negative at one point. But don't let that fool you into thinking the worst is over for the oil patch. Even with crude moving higher, a record glut of oil in storage and continued overproduction are only compounding the situation. For many companies in the oil business, things will only get worse before they get better. And that means there's a lot of risk that investors should avoid.
But that doesn't mean there are no opportunities worth considering. To help you get started in finding the stocks worth buying in the 2020 oil crash, we tapped five of our top energy industry contributors to offer up their best ideas. They came back with three of the strongest companies in the safest part of the oil patch (all on sale right now) and two tangential ideas that could benefit from a protracted period of cheap oil.
Their top stock ideas for the oil crash: midstream companies TC Energy (NYSE:TRP), Magellan Midstream Partners (NYSE:MMP), and Enterprise Products Partners (NYSE:EPD); auto giant General Motors (NYSE:GM), and convenience store operator Casey's General Stores (NASDAQ:CASY). Keep reading to learn why these five made the cut, according to our experts.
Completely immune to lower oil prices
Matt DiLallo (TC Energy): Shares of TC Energy have fallen by double digits this year as the Canadian pipeline giant has been swept up in the oil market carnage. But that sell-off makes it an even more compelling buy since its business model is immune to near-term fluctuations in oil prices and volumes. It generates contractually secured cash flows that require shippers to pay fees even if they don't use their allotted capacity. The durability of its cash flow was on full display during the first quarter as it jumped about 15% thanks to recently completed expansion projects.
TC Energy typically pays out about 40% of its cash flow via its dividend, which yields about 5% following the sell-off in its stock price. That low payout ratio enables TC Energy to retain lots of cash to help finance expansion projects. It currently has one of the largest backlogs in the pipeline sector, which should provide it with the fuel to grow its dividend by 8% to 10% next year and at a 5% to 7% yearly pace after that.
This healthy growth rate, when combined with TC Energy's conservative financial profile, lower valuation, and attractive dividend, makes it a top stock for oil investors.
Gas-guzzlers may make a comeback
Travis Hoium (General Motors): I'm going to make an oil-adjacent pick with General Motors, which has seen shares fall nearly 50% so far this year. Investors are worried, with good reason, that auto sales will plunge in 2020 because consumers will have less to spend on new vehicles. But if they do start buying vehicles, the oil crash could drive them to more-expensive options from GM.
Trucks and SUVs are the highest-margin products in GM's lineup, so when they're selling well, the company is highly profitable. And if consumers think gasoline prices will remain low for the foreseeable future, they may be more willing to buy a gas-guzzling vehicle.
On top of the potential for a short-term gain from a push by low oil prices toward trucks and SUVs, GM is well positioned for the future. Long term, I think GM has made smart investments in autonomous vehicles with a controlling stake in Cruise. The company is building the future of autonomous driving and ride-sharing, which could be more lucrative than any automobile manufacturing business today. In the short and long term, GM is built to succeed.
Less pain at the pump
John Bromels (Casey's General Stores): When oil prices tumble, so do gasoline prices. That not only benefits companies with large fleets of vehicles, but also the gas stations that sell fuel. A lot of gas stations, though, are part of a larger oil company getting hammered by the low prices elsewhere in its portfolio (like, for example, ExxonMobil).
Casey's, on the other hand, is just a chain of gas stations and convenience stores, primarily in the upper Midwest, with a special emphasis on rural areas. As states begin to ease travel restrictions (in many cases leading off with those same rural areas), Casey's is likely to see increased traffic at its stores.
With gas prices low, those higher numbers of customers may be able to spend more money at the convenience stores that provide the bulk of Casey's profits (gasoline sales still account for most of its revenue). Meanwhile, it may also be able to improve its margins on gasoline thanks to its embrace of price optimization software.
Casey's shares are down about 11% year to date, so it looks like a good time to buy.
Good management and better assets to see it through
Tyler Crowe (Magellan Midstream Partners): For the most part, midstream companies -- the pipeline and logistics companies that move oil and products -- are considered some of the safer investments in this downturn. Not all midstream companies are created equal, though. The closer those assets get to a wellhead, the more likely they are to be disrupted by well shut-ins and limited storage capacity.
Magellan Midstream Partners' assets are some of the furthest removed from the wellhead. Its largest business is the transportation and storage of refined petroleum products like gasoline and diesel. While it will certainly see some effects from lower demand, those effects will be less than for those moving crude oil. Management expects that reduced volume in its network and lower commodity prices for its non-fee-based businesses will result in a 10% to 16% reduction in distributable cash flow for 2020.
Thanks to Magellan's conservative management team, the company will be able to handle that kind of financial blow without too many ill effects. Management has decided to not increase its quarterly payout for the rest of the year and preserve $75 million to $150 million for 2020. That excess cash can help wrap up spending on some construction projects without having to rely on debt to pay its bills. Magellan has a total debt-to-EBITDA ratio of 2.9 times, one of the lowest in the midstream industry.
With its well-positioned assets, a conservative management team, and a strong balance sheet, Magellan Midstream Partners is one of the better investments to make in the oil and gas industry right now. With a distribution yield of 10%, investors could generate some serious income with this stock.
Far from the wellhead
Jason Hall (Enterprise Products Partners): As Tyler pointed out, the closer you are to the wellhead, the more at-risk your business is. On the other end of the value chain, businesses like Enterprise Products that provide transportation and storage for producers, refiners, and other companies that use or need storage are where there's still safety and opportunity.
This isn't a perfect business by any means; U.S. gasoline consumption has fallen by half during the coronavirus shutdown, and lower volumes mean less cash flow. But the crisis has also created opportunities for strong companies like Enterprise Products. Case in point: Refiners and producers have cut output much slower than demand has fallen, and storage is filling quickly. So it is repurposing some of its storage assets for natural gas liquids to hold gasoline and diesel instead.
Enterprise Products can do this because of a strong balance sheet and conservative capital allocation strategy. At 3.6 times EBITDA and a distribution coverage ratio (how much cash flows exceed the payout) of 1.6 times, it is in very strong financial shape. Management also cut $1 billion in planned growth spending this year, further bolstering the balance sheet.
Units are down 44% from the 2020 high at recent prices, and the distribution yield is above 10%. There are no guarantees, but Enterprise Products has gone more than 20 years without having to cut the payout. I expect management will keep the streak intact, but even if the payout does get cut during this crisis, Enterprise Products is too good a business to pass up at this price.