The oil market has been absolutely brutal this year. Crude oil prices and demand cratered because of COVID-19, causing a wave of bankruptcies across the sector. All that turbulence has had a devastating impact on oil stocks, evidenced by the Dow Jones U.S. Oil & Gas Index, which has cratered 40% this year.
However, while times are tough across the industry, market conditions have started to improve. Because of that, we asked three of our energy contributors to dig through the rubble to see if they could find some potential diamonds in the rough that could regain their shine as the rebound continues. They unearthed Chevron (NYSE:CVX), Total (NYSE:TOT), and Enbridge (NYSE:ENB).
Nothing succeeds like success
Daniel Foelber (Chevron): At the beginning of 2005, Chevron was the smallest of the five non-nationally owned oil majors by market capitalization. Today, it's gunning for Exxon's No. 1 spot.
Chevron has provided the best growth and shareholder returns over the past 15 years, and there's reason to believe it could be the leading oil major over the next 15 years as well.
Chevron has consistently exhibited a rare combination of prudence and capital management in an industry that is notorious for overborrowing and overspending. Low debt-to-capital and debt-to-equity are reasons why the company's balance sheet continues to be one of the best in the industry. And since lower oil and gas demand and prices could last for years, Chevron's financial strength is now more important than ever.
Chevron's even-keeled temperament was most recently put on display with the company's decision to abstain from overbidding for Anadarko and wait for a better deal instead. That deal came in late July, when Chevron proved that patience is a virtue and agreed to acquire Noble Energy for what looks to be an attractive price.
Chevron currently yields 6% and has raised its dividend for 32 consecutive years, meaning it will pay you to be patient as well.
Changing with the times
Reuben Gregg Brewer (Total): Chevron is a great oil company, but there's one problem -- the world is shifting toward electricity. That change will likely take decades, but for those worried about the eventual demise of oil, France's Total is charting a slightly different course. Specifically, it has been buying its way into the electricity space.
Total isn't completely changing its stripes; it remains an oil company. What it's doing is diversifying its business into a new area today to ensure that it changes with the big-picture shifts taking place in the broader energy sector. For some investors that will sound like the more appropriate plan given the increasingly negative view of carbon-based fuels.
That said, there are other reasons to like Total. For example, it offers investors a 7.8% yield backed by a dividend that has increased or held steady for 35 consecutive years. And, perhaps more important today, Total stated during its second-quarter 2020 earnings conference call that it believes the current dividend is sustainable with oil as low as $40 or so per barrel. If you like the idea of investing in the energy patch while other investors are running scared, but want to hedge your bets just a little, Total could be the winning call for you.
A big-time oil-fueled dividend
Matt DiLallo (Enbridge): This year has been a turbulent one for the oil patch as crude prices have tumbled, taking production volumes down with them. That's having an impact on some pipeline companies, which have seen their cash flow squeezed by falling volumes.
However, it's not affecting Enbridge one bit. That was evident during the first half of the year as its cash flow came in slightly ahead of its expectations thanks to the overall resilience of its business model. Because of that, it's still on track to meet its full-year forecast.
Despite that durability, shares of Enbridge have fallen about 20% this year. That has pushed its dividend yield up to an attractive 7.6%. While a payout that high is sometimes a cause for concern, that's not the case for Enbridge. That's because it has a relatively conservative dividend payout ratio of around 65% of its cash flow, and it has an investment-grade balance sheet backed by a leverage ratio below its target range.
That solid financial profile gives Enbridge the financial flexibility to continue expanding its operations. The company currently has several billion dollars' worth of projects under way, which it expects will fuel mid-single-digit annual cash flow growth for the next several years. That should enable Enbridge to continue increasing its already attractive dividend, which it has done for the past 25 years.
With a high yield, lower share price, and visible growth, Enbridge is an excellent oil stock to buy this month, especially given its resilience to this year's turbulent market conditions.