The COVID-19 pandemic has hit the oil industry hard. Even with the worst for the sector as a whole likely in the rearview mirror, millions of people around the world are set to work remotely for months to come, and the global travel industry is in shambles. It's going to take a long time for the industry to recover, and some think it may never fully bounce back.
Yet even with the uncertainty and ongoing troubles, investors can still make money. Oil and natural gas remain the fuels that power global transportation, manufacturing of feeds, and electricity delivery. Renewables are steadily becoming more important and will eventually displace hydrocarbons, but that's likely to take decades to happen. In the meantime, investors in the best companies can profit from the transition. Three that look worth buying now are Core Laboratories (NYSE:CLB), Enterprise Products Partners (NYSE:EPD), and Phillips 66 (NYSE:PSX).
Built to ride things out for the turnaround
Oil prices and demand fell faster and farther than ever this year; oil and gas producers have had to gut their spending plans for 2020 simply to hold it together. Even with oil prices having reversed course from the lows of April, crude prices are still down 40% this year, and demand is also still well below pre-crash levels.
As much as this has hurt producers, the biggest losers are the companies they hire to do the actual work. If you're in the business of drilling wells, supplying well pipe, or any of a dozen other services usually done on a contracted basis, it's been absolutely brutal. As good measures of just how bad, look at the SPDR S&P Oil & Gas Equipment & Services ETF (NYSEMKT:XES) and iShares U.S. Oil Equipment & Services ETF (NYSEMKT:IEZ). These ETFs, which comprise the largest companies providing services to oil and gas producers, are both down more than 50% this year.
Core Laboratories is a major oilfield services provider, but it's not the typical pick-and-shovel contractor with expensive equipment to pay for even when nobody's hiring. Core Lab is more of a tech play, using proprietary technology to analyze oil and gas wells to help producers maximize every dollar they spend to develop those resources.
Core Lab is a buy right now because its business model will ensure it rides out even this brutal downturn, and the services it provides are critically important to producers when they start drilling again. The reality is, the massive cut in spending will have serious implications on the back side of the downturn. It's not a stretch to say that the lack of spending today could lead to an undersupplied oil market within the next year.
With shares down by almost half this year and down a painful 82% over the past three years, Core looks like a combination of deep value (the business is still cash-positive) and turnaround. The company's aim is to pay out a large portion of its free cash in dividends during healthy parts of the market cycle. The dividend was recently dropped to a penny per quarter; when business picks up, investors can likely count on a nice dividend stream from the company on the other side of this downturn.
Connecting the dots
Enterprise Products Partners is one of the biggest energy companies in the U.S. It has 50,000 miles of pipelines that transport natural gas, crude, refined products, and petrochemicals, along with more than 60 facilities and docks that process and handle those products. Simply put, Enterprise Products plays a critical role in delivering energy products and petrochemicals that are used to make everything from plastics to fertilizers.
While the drop in demand has affected its cash flow, Enterprise Products isn't affected by the deep drop in commodity prices, as oil producers are. The logistics services it provides are typically on long-term contracts with set prices that are not affected by oil or gas prices.
That's not to say it's not affected at all. Management announced it would cut more than $1 billion from planned capital spending for 2020, delaying several expansion products in order to focus on maintaining a bigger margin of safety on the balance sheet. The combination of its rock-steady cash flow and cutting back on spending during the downturn should help it continue an amazing dividend streak:
At recent prices, Enterprise Products' yield is over 9%. And while dividends are not a promise, the company's business and track record suggest that it will continue to pay investors generously.
In the right parts of the oil and gas business
Phillips 66 is a massive integrated oil and gas company. But if there's one thing about Phillips 66 that makes it appealing during a downturn, it's what the company doesn't do: oil and gas production. Since it's not a producer, the company has been able to avoid the worst of the oil crash that has many producers still selling oil for less than it costs them to produce it.
Phillips 66 is a fuel refiner and marketer, midstream operator, and petrochemical manufacturer. And while the refining business is taking a hit -- gasoline demand is still down by double digits -- the company's midstream and chemicals segments have held up better. Part of the company's strength is that many of its midstream operations are focused on natural gas, which hasn't suffered nearly as sharp a drop in demand as oil.
Lastly, it has a rock-solid balance sheet, with billions in cash and very low-cost and well-structured debt that it can easily service. This made it easy for the board to maintain the dividend in May, while dozens of other oil stocks were slashing their payouts.
And at recent prices, it's still a buy, down 31% this year, pushing the dividend yield to 4.75% at recent prices. Not only is Phillips 66 a great dividend growth stock, but it's also a high-yield investment at these prices:
Worth buying now, and holding through the recovery
The oil sector isn't out of the woods yet. Oil prices are still unprofitable for many producers, and even in the second half of the year, the industry expects that demand could drop by over 6 million barrels per day. But even with this reality -- and the potential that COVID-19 could hinder the recovery even further -- investors should give Core Laboratories, Enterprise Products Partners, and Phillips 66 a hard look.
Whether it's upside gains on the recovery, dividends for income, or the prospects of future dividend growth, there's something to like in at least one of these three investments.