Rising oil prices have attracted investors back toward energy stocks. That looks sensible because higher prices generally mean more profits for energy companies. However, the issue is, no one knows where the oil prices may head from here. Saudi Arabia played a key role in stabilizing oil prices by taking a voluntary production cut of 1 million barrels per day recently. The Kingdom's commitment, however, is only for February and March, after which it may resume its production. That may be bearish for oil prices.
Amid such uncertainty, it is best to invest in companies that can do well irrespective of short-term commodity price volatility. Here are three such stocks that are well-placed to thrive in the long run.
Chevron (NYSE:CVX) stock currently offers an attractive dividend yield of 5.4%. The company had a challenging 2020 and reported a loss of $5.5 billion for the year. Excluding the impacts of one-time charges and currency effects, the loss stood at $368 million. That contrasts with earnings of $2.9 billion and adjusted earnings of $11.9 billion in 2019. Low oil and gas prices significantly impacted Chevron's upstream earnings while lower gasoline demand hurt its downstream segment's performance last year.
Despite these challenges, the company's production for the year rose 1% to 3.08 million barrels per day in 2020. Chevron has been reducing its capital and operating expenses in response to the market demand. For the year, the company generated more cash from operations than it spent on capital projects. In Q4, for the second quarter in a row, the company's Brent oil cash breakeven price was below $50 per barrel.
Reduced costs combined with a strong balance sheet positions Chevron well, even for periods of low oil prices. At the same time, the company can easily grow its dividend at Brent prices above $55 per barrel. Chevron, a Dividend Aristocrat, has stated that sustaining and growing its dividend is its top priority. Income investors will surely find that statement compelling.
Refiners faced particularly tough market conditions in 2020, with lower margins forcing them to shut or convert their uncompetitive refineries. As the coronavirus pandemic subsides and people start going out more, the demand for refined products should recover. An expected recovery in demand combined with reduced supply due to refinery closures or conversions should help boost refining margins. Though converting refinery to, say, renewable fuel production will still supply the market with fuel, the renewable fuel production capacity of a converted refinery is typically somewhat lower than products from crude oil. Moreover, it may take years to fully convert a refinery to renewable fuels, during which time it generally no longer processes crude oil. So, refinery closures and conversions will take some supply off the table temporarily and some of it permanently.
Valero Energy (NYSE:VLO) is among one of the most well-placed refiners to benefit from this favorable demand-supply dynamic.
Valero Energy has one of the lowest refining cash operating expenses per processed barrel among its peers, and it generated the highest average free cash flow among its peer group over last 10 years. It's also responding to the growing demand for renewable diesel by significantly expanding its renewable diesel production capacity. Nearly half of the company's 2021 growth capital spending relates to renewable diesel projects. With an attractive yield of 5.5%, Valero stock makes a great addition to any income investor's portfolio.
While several energy companies reported losses in 2020, TC Energy (NYSE:TRP) reported net income of $4.5 billion Canadian dollars for the year, up from CA$4 billion in 2019. The company also recently raised its Q1 dividend by 7.4%, its 21st consecutive year of dividend increases.
TC Energy's consistent growth can be attributed to its diversified assets that are regulated or contracted long term. These assets allow the company's earnings to remain relatively resilient to commodity price fluctuations. Its assets are also strategically located to cater to the high demand for takeaway capacity from Canada's oil sands to the markets along Gulf Coast. There is limited takeaway capacity to transport the heavy and cheap crude oil from oil sands, and most Gulf Coast refineries are designed to process this unique type of crude.
TC Energy has ample growth opportunities, too. It placed CA$5.9 billion of projects into service in 2020. Moreover, it has a pipeline of around CA$20 billion of capital projects. That gives the company the confidence to raise its annual dividend by 5% to 7% in the years to come. With a dividend yield of 5.4%, TC Energy stock looks like an alluring buy.