Energy has been the worst-performing sector of the stock market in 2020. Lower oil and gas prices, along with lower demand for refined products have taken their toll on the performance of small and big energy companies alike.
Three industry leaders, integrated oil major Chevron (CVX +0.79%), natural gas pipeline giant Kinder Morgan (KMI +2.75%), and leading upstream exploration and production (E&P) company ConocoPhillips (COP 1.05%) are all trading at bargain prices. Here's why they're worth the risk.
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Chevron
Chevron is one of the few oil majors that hasn't cut its dividend this year -- and for good reason. The company continues to sport the best balance sheet in the industry, with the lowest financial debt-to-equity ratio and debt-to-capital ratio among its peers.
CVX Financial Debt to Equity (Quarterly) data by YCharts.
The company's financial health in the energy sector -- a sector that's notorious for overspending and overleveraging -- is one reason why Chevron is the last oil stock in the Dow and not ExxonMobil. That being said, it's hard to ignore the company's terrible earnings so far this year.
Like its competitors, Chevron is struggling to perform in a low-oil-price environment, posting negative earnings and a 56% decrease in revenue, compared to the same period last year. One of the few bright spots is that Chevron still expects to be cash flow positive for the year, thanks to cost cuts and efficiency improvements.
Chevron isn't doing well but has been one of the best oil majors to own in better market conditions. And with shares down 42% for the year, its dividend now yields 7.1%. With these risks in mind, long-term investors could benefit from picking up a few shares of Chevron right now.
Kinder Morgan
Kinder Morgan is shaping up to be a reliable income stock, but no one is noticing. In fact, the stock has lost 42% of its value so far this year, which has pushed its dividend yield up to 8.5%.
Management has repeatedly stressed the importance of the company's dividend, and it has ample cash to support it. So far this year, Kinder Morgan has earned distributable cash flow -- which is the amount of cash available to potentially pay dividends -- of $1.47 per share, far above the $0.7875 it has paid per share in dividends.
The company originally predicted it would raise its dividend from $1.00 a share to $1.25 per share this year, but given the market conditions, opted instead for a modest raise to $1.05. Given the stock's decline and the already high yield, analysts were questioning dividend raises on the grounds that share buybacks or other options would be a more effective approach.
CEO Steve Kean commented that, "just because dividends are out of favor now, doesn't mean we shouldn't be paying them and shouldn't be increasing." Executive chairman Rich Kinder said that "we are confident that KMI will continue to generate strong cash well in excess of our expansion capex [capital expenditures] needs, and the funding of our current dividend that will allow us to maintain a strong balance sheet and return significant additional cash to our shareholders through increased dividends and our share repurchases."
There were three important takeaways from Kinder Morgan's Q3 earnings report:
- The company is prioritizing the dividend.
- Kinder Morgan is well-positioned to sustain its dividend.
- The company's earnings are on track.
Kinder Morgan has posted good results given the circumstances, suffering only single-digit declines in earnings and revenue. The company's hefty stock-price decline is arguably already factoring in concerns regarding the long-term growth of natural gas, making the company a cheap income stock to consider buying right now.
ConocoPhillips
ConocoPhillips doesn't have a diversified portfolio like Chevron or the reliable cash flow of Kinder Morgan. As an E&P, it's arguably the riskiest stock on this list. However, shares of ConocoPhillips are now down 53% for the year, and there's reason to believe the stock has sold off too hard.
On October 19, ConocoPhillips presented its acquisition of competing E&P Concho Resources. One of the main reasons for the all-stock deal was that ConocoPhillips was able to acquire Concho's assets on the cheap, bringing the company's average cost of supply down to just $30 per barrel of West Texas Intermediate (WTI) crude oil, the commonly quoted benchmark. A lower cost of supply means ConocoPhillips can make money on its assets even in the current oil environment. As a whole, the company is focused on developing its portfolio with an average cost of supply below $40 per barrel.
ConocoPhillips posted a net loss in the second quarter of 2020, quoting an average realized price per barrel of oil equivalent (boe) of $23.09. Yet in the first quarter of 2020, which had an average realized price per boe of $38.81, ConocoPhillips was able to generate a profit of $0.45 per share. The result wasn't great, but it proved the company can actually generate a profit in an environment where others can't, giving it an edge in the upstream industry.
WTI prices are currently $39.61 per barrel, similar to the average price in the first quarter of 2020. The oil stock yields 5.7% at the time of this writing.
Take advantage of the sell-off
Chevron, Kinder Morgan, and ConocoPhillips all have their problems, but there's reason to believe their stocks have sold off too hard. Chevron has the best balance sheet among oil majors, giving it room to take on debt, as needed, without hurting its financial health.
Kinder Morgan continues to generate respectable earnings, thanks to its strong free cash flow. ConocoPhillips has proven it can make money at lower oil prices. Each stock also pays a sizable dividend -- the average yield of the three is 7.1%.
For investors who can stomach the risks, buying these three energy stocks on sale may be a good move.
