Energy, or more specifically oil and gas, has had a nice run over the past year. It was the best performing market sector in 2021 and has held onto that crown so far in 2022. Oil and gas is notoriously cyclical, though, so there is always that lingering feeling that the bottom could drop out at any moment.
Fortunately, we invest in companies, not commodities, and the individual situation at any company can sometimes be more important than what's driving the broader sector. So while shares of Marathon Petroleum (MPC +1.44%), TotalEnergies (TTE +0.00%), and Tellurian (TELL +0.00%) are likely to benefit from rising commodity prices, there are reasons to think they are poised to do well even if commodity prices don't cooperate. Here's why investors should consider these three oil stocks this month.
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Too much cash to ignore
Buying oil refineries certainly seems like investing in "old" energy that will suffer as we transition away from oil. It's a fair critique of any oil company right now, but it also doesn't give much credit to a company's ability to change. With some significant investments in renewable diesel in the works and over $10 billion in cash on the books, Marathon Petroleum has a lot of optionality to both transform the portfolio and reward shareholders along the way.
Much of that cash pile comes from the sale of Speedway, its marketing and retail division. Management estimates that the after-tax proceeds of the sale was $17.2 billion. So far, it has used $5.5 billion of it to buy back shares. As of its most recent quarterly results, the board has given authorization for an additional $9.5 billion in buybacks. Think about that for a minute. This is a $49 billion company that has already bought more than 11% of its market capitalization in share repurchases and has the authority to buy back an additional 19% at its current stock price.
What's more, Marathon is making some long-term moves that should give investors faith in its ability to manage the transition away from fossil fuels. It has just completed the conversion of one refinery to a 184 million gallon per year renewable diesel facility, and it has started the conversion of a second facility that will produce 730 million gallons per year. The addition of these two facilities will bring Marathon's renewable energy processing capacity to 1.5 billion gallons per year.
To put a cherry on top, shares of Marathon look awfully cheap. Its price-to-book value of 1.7 is one of the lowest valuations we have seen for this stock this decade. The combo of an immense shareholder reward program, a realistic and affordable energy transition plan, and a dirt cheap valuation make Marathon's shares a compelling buy.
Right strategy, right time
When it comes to looking for a fossil fuel company with a clear plan to transition to other energy sources, few have a better strategy in place than TotalEnergies. The plan is rather straightforward, manage the oil portfolio to maintain production and maximize cash flow, grow the natural gas and liquefied natural gas (LNG) business over the short and medium term, and invest in energy alternatives across the board -- solar, wind, hydrogen, storage, carbon capture -- to provide the eventual path away from fossil fuels.
To be fair to others, TotalEnergies isn't the only one using this plan. What is unique about this strategy, though, is that it also involves considerable investor returns along the way. Its upstream operating costs per barrel of oil are the lowest of the integrated oil and gas giants, which puts it in pole position to invest heavily in transitioning the portfolio while giving back mountains of cash to investors. In 2021, the company generated enough cash to invest $13.3 billion into the business, reduce total debt outstanding by $6 billion, pay $8.2 billion in dividends, and still have enough left over for $1.5 billion in share repurchases. With oil and gas prices significantly higher so far in 2022 than the start of 2021, management is already projecting $2 billion in share repurchases in the first six months of the year on top of its recent 5% dividend increase.
Even though TotalEnergies has, arguably, the best transition plan in place among the Big Oil companies and it is throwing off cash by the fistful, the company's stock remains one of the cheaper of its peers. Its price-to-book value ratio of 1.41 is well below those of ExxonMobil (2.05) and Chevron (1.91). With a dividend yield of 5.22% to boot, shares of TotalEnergies look hard to pass up right now.
A hair-pulling investment that could also transform a portfolio
Let's get one thing straight first: Tellurian is very much an all-or-nothing investment that has been immensely frustrating to own for the past several years. The company has been telling investors for a couple of years that it intends to start construction on its liquefied natural gas (LNG) export terminal. Those plans, though, kept getting put on hold as it struggled to line up financing for the costly endeavor.
Despite the operational setbacks and the fact that its initial financing plan hasn't come to fruition, the underlying thesis for Tellurian is still there: Global demand for LNG is still very much on the rise, and Tellurian has one of the few shovel-ready projects. While it wasn't able to find equity partners that would have owned a portion of the facility and the LNG cargoes it produces, it has found a sufficient amount of gas buyers to ensure that, if built, there is plenty of demand in place.
Financing a multibillion-dollar LNG export facility isn't easy. It's even harder when you're a start-up company and not a deep-pocketed oil and gas company with other assets bringing in cash while you build. This isn't management's first rodeo, though, as Executive Chairman Charif Souki was at the helm at Cheniere Energy when it was building and financing its first LNG facility years ago.
It's entirely possible that the whole thing doesn't pan out as planned and Tellurian either can't get sufficient financing or has to take on so much capital that it dilutes existing shareholders stake significantly. If it can get this LNG built without sacrificing too much investor capital, then it could be an incredible return for investors. At its current share price, that looks like a risk worth taking.
