Over the past month, oil prices have started to recover as more and more of the global economy opens back up for business. Yet even with these positive signs, COVID-19 remains a very real threat; health experts say multiple waves of the deadly disease are highly likely, and a return to physical isolation would reset much of the gains in crude oil demand the industry desperately needs to remain solvent.
Moreover, even if we see a steady return to normal over the rest of the year, a massive oversupply of crude oil will continue to weigh on producers, their suppliers, and the companies that do the work in the oil fields for them. Add it all up, and the oil patch is still a mess, and a highly risky place to invest that could remain that way for some time to come.
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With that in mind, we asked four of our top contributors who know the oil industry well for some alternatives to oil stocks. They came back with NV5 Global (NVEE 0.65%), NextEra Energy (NEE 0.45%), Williams Companies (WMB 2.48%), and Anheuser-Busch InBev SA/NV (BUD 1.43%). Keep reading to learn why these four very different companies look like better investments than any oil stock right now.
A trend worth investing in
Jason Hall (NV5 Global): There's a big reason why the vast majority of my portfolio isn't in oil stocks, and almost all of my investments during the coronavirus crash have been outside the oil patch: Oil's future prospects are limited, while there are other mega-trends that should be far more rewarding for investors.
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That brings me to NV5, a relatively small-fish engineering and infrastructure services business. The company is poised to benefit from two huge trends that will drive trillions of dollars in infrastructure spending over the next several decades. On one hand, you have the aging infrastructure in many western countries, including the U.S., that simply needs updating and replacing. Whether it's roads, bridges, the electrical grid or water infrastructure, it's going to take a lot of money over a lot of years to update these things.
Then there's a global secular trend that will see the urban middle class grow by 1 billion new members over the next decade. It's going to take trillions of dollars to add new capacity to telecommunications, water and waste, transportation, and energy infrastructure.
Both of these trends are enormous, and will present NV5 with plenty of opportunities for big growth. Shares are down 42% over the past year on worries about the effect the lockdown will have on spending for big projects NV5 consults on. With incredible long-term prospects, NV5 is a hyper-growth company trading at fire-sale prices.
Low risk, big potential
John Bromels (NextEra Energy): With so much volatility in the oil and gas sector, investors might want to look to more reliable parts of the energy sector, like utilities. How about the largest publicly traded utility in the world, NextEra Energy?
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NextEra operates electric utilities in Florida, where power-guzzling air conditioning is running almost year-round. That's good for NextEra's two Sunshine State utilities, the 5 million-customer Florida Power & Light and the smaller 450,000-customer Gulf Power. Those operations churned out $5.5 billion in cash flow in 2019, more than enough to maintain the network and pay the company's dividend, which currently yields 2.2%. That dividend is set to grow: NextEra has achieved Dividend Aristocrat status through 25 consecutive years of payout increases, and is predicting 10% annual dividend growth through at least 2022.
The company is more than just a utility, though. It churned out an additional $3.1 billion in cash last year from its 46 gigawatt power generation business. Of that power, 54% goes straight to its Florida network, but it sells the rest to utilities around the country. Better yet, more than 90% of the energy it sells is from renewable sources like wind and solar.
With a large and growing backlog of renewable energy generation projects and reliable cash flow and dividend growth, NextEra looks stronger than just about any company in the oil patch.
Gas has a brighter future
Matt DiLallo (Williams Companies): Oil demand has cratered this year due to government restrictions on non-essential businesses and travel to slow the spread of the COVID-19 outbreak. That has caused crude to pile up in storage, which has weighed on pricing. There's so much excess oil inventory that it could take years for the market to normalize since air travel -- one of the key demand drivers -- likely won't bounce back to its former heights anytime soon.
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One of the beneficiaries of the oil market's trouble is natural gas. The cleaner-burning fuel has been relatively immune to the COVID-19 outbreak as consumption has remained above the three-year average. Because of that, gas drillers have stayed busy. That trend appears poised to continue since oil-focused companies will complete fewer wells in the future, causing a decline in associated gas output.
With volumes in gas-focused regions set to rise, pipeline companies like Williams Companies will benefit. It should be able to continue growing its fee-based income, giving it more fuel to increase its 7.8%-yielding dividend. That combination of steadier growth and an attractive income stream makes Williams a better option over oil stocks, which have seen their dividends and growth prospects plunge with crude prices.
A resilient business getting hit particularly hard
Tyler Crowe (AB InBev): Chances are if you're looking at oil stocks, you're looking for cheap stocks that have been hit hard by this crisis but have a good chance of rebounding. If that is the case, then AB InBev is worth considering. While it isn't exposed to commodity price volatility, the brewer's business has been hit particularly hard by this crisis, and management expects a significant drop in business for the second quarter. According to management, approximately one-third of its sales are from its "on-premise" channel -- a fancy way of saying bars, clubs, and restaurants. With countries around the world enforcing varying forms of stay-at-home orders or complete lockdowns, AB InBev anticipates volume declines of more than 30%.
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The good news is that, even though the company is expected to hit some hefty speed bumps, there are some reasons to be optimistic. For one, the company was able to sell its Australia business for $11 billion, which it intends to use to add some significant cash to its coffers and to pay down some debt. What's more, despite its severely depressed sales in the Asia Pacific region for the quarter, the company still managed an EBITDA margin of 35%.
AB InBev isn't without its warts. Its debt load is cumbersome to say the least and sales in the North American market have been struggling for some time. That said, its growth potential in emerging markets is a major opportunity and its business is strong enough to muddle through a few tough quarters. With shares trading at a 10-year low on a price-to-book value basis, AB InBev is the kind of value stock to consider over oil stocks today.
