Fool analysts Mark Reeth and Tyler Crowe come all the way in to the studio on Christmas Day (no, really!) to discuss which energy stocks are the stalwart, boring-but-useful equivalent of getting socks and underwear for Christmas and which are the coal in your stocking.
They even identify the energy stock equivalent of the well-intentioned but disappointing present from Grandma and the noisy drum set you immediately regret giving as a gift. Tune in for some solid stock analysis wrapped in holiday silliness and a Santa hat!
A full transcript follows the video.
Mark Reeth: 'Tis the season for podcasts to stoop to cheesy holiday editions, and we're no different! This is Industry Focus.
Hey everybody, I'm Mark Reeth here with Tyler Crowe. Merry Christmas!
Tyler Crowe: Merry Christmas.
Reeth: We're playing this on Christmas.
Crowe: Well, it's prerecorded. Probably everybody knows ...
Reeth: No, we're here on Christmas.
Crowe: It's live, sorry. It's live.
Reeth: How dare you?
Crowe: We're doing this on Christmas Day. We've spent time away from our families. We're doing this on Christmas for our listeners.
Reeth: For our listeners -- if our listeners are listening right now, they're probably having a great Christmas.
Crowe: Probably avoiding their families a little bit.
Reeth: It's understandable.
Crowe: You need that 20-minute break.
Crowe: The uncles and aunts ... you just need a little time away.
Crowe: So let's listen to a podcast.
Reeth: You know what? And what a podcast it's going to be. We're doing the cheesy holiday edition thing. I have a funny hat, you've got a funny hat. Let's do some holiday stock ... ing stuffers!
Crowe: Oh, look at that pun! That was beautiful.
Reeth: We'll just make puns like that over the next 10 minutes, it's going to be a lot of fun.
Okay, we're going to break down this show. It's the energy show, so we're going to take a look at a couple different energy stocks. We figured we'd break them down by best to worst, but of course it's the holiday show so we're going to call these "stocking stuffers."
We're going to start with the holiday staples -- the socks, the underwear, Grandma's sweater -- the stuff you always get. It's not going to be bad, it's not going to be great. What have you got? What kind of companies are looking like that?
Crowe: The really boring socks and underwear; the stuff you get every year, but you know what? You're going to use them, probably more than anything else that you get.
Reeth: Those are the big ones.
Crowe: Very big, staple companies in the energy space right now. It's kind of a tough time with oil prices dropping like that, so you're really looking for those good, stable companies right about now. That's why I think these are really those boring socks and underwear.
We start with ExxonMobile. It has grown or maintained its dividend for close to 74 years -- split adjusted, of course. Superior free cash flow generation for a company, and they've had a very long history of returning that back to shareholders through that dividend and through share buybacks and stuff like that.
As a company with more than 100 years, they have been through way, way worse than this recent plunge in oil prices and they will probably go through way, way worse for who knows how long.
Reeth: ExxonMobile, the socks of energy stocks.
Crowe: The socks of energy stocks!
Crowe: Then for the underwear, you've got Enterprise Products Partners.
Reeth: I'm sure that's their new advertising campaign.
Crowe: They should have that on their presentation. "Enterprise, the Underwear of Energy."
But their success of their business is not built on the price of oil. It's built on the business of actually moving oil and gas, so it's a volume-based business. If you look at the United States right now, prices are a little down buy you're probably not going to see a huge volume drop because of it.
That's a really important part with them. Everything moves by fixed-fee, volume-based contracts. It makes it a lot more stable, much more predictable -- and they also seek out those inefficiencies.
When something's really cheap, they can sell it as a refined product or a petrochemical product overseas and make a high margin on it. They've been doing a lot of that right now with trying to export natural gas liquids such as propane and butane overseas.
Then again, looking at that safety, for a master limited partnership they have a 1.4 distribution coverage ratio, which means that they cover their distribution to shareholders by more than 40%, which is great for a master limited partnership.
They have more than a 15-year history of growing their dividend like clockwork. That kind of stability is exactly what you're looking for.
Crowe: We've got socks, we've got underpants. Then we've got National Oilwell Varco. Maybe kind of like ...
Reeth: What's the analogy here, the long johns?
Crowe: The fancy socks.
Reeth: Fancy socks.
Crowe: The wool socks that you might not use every time, because this one has been hit a little bit lately because of the decline in oil prices, and you've also got a glut of rigs and equipment on the market right now because everybody's like, "Well, maybe we don't want to drill for so much oil."
Crowe: You've got that, but they are in the business of replacing the consumable equipment. You've got the drill bits that eventually wear down, and eventually rigs. Even though it takes longer, they have to be replaced every 20 or 30 years.
They've got a very large built-in customer base because of a rig standardization program which basically says, "Oh, you bought our rig? Now you have to buy all of our equipment that you wear down eventually afterwards."
Crowe: Nice large built-in customer base and it has, again, that strong cash generation. It's been doing it for years. Even in a time like this, they probably will still be able to do it.
Reeth: Socks and underwear, everyone needs them!
Crowe: You need them, and you'll use them.
Reeth: Okay, what about a bad Christmas? What are some of those lumps of coal out there that we kind of want to avoid?
Crowe: Lumps of coal. Well of course, ironically, if you got lumps of coal in your stocking, it's going to be a coal stock, one of them.
Reeth: Oh, boo! You had to.
Crowe: One I'm really looking at very, I guess you could say pessimistically, is Walter Energy (NASDAQOTH:WLTGQ). They're not the traditional coal company that everybody thinks about. It's not the ones that sell coal to be burned in a utility; this is metallurgical coal. It's used to refine steel.
If you look at it right now, the steel market's been absolutely abysmal for the past couple of years. You've seen waning demand in China as well as in Europe, so the overall demand is there and the glut has been building up because everybody thought that China was going to grow 7%, 8%, 10% in perpetuity. Guess what? That doesn't necessarily happen.
You look into that, and then they've got a balance sheet that looks pretty rough right now. Their EBITDA to interest expense ratio is about 0.38, which means they've got a lot of ground to cover there. They're burning through a ton of cash to make it happen, so thinks are looking a little questionable for them.
Reeth: Okay. What a lump of coal it is.
Crowe: Then the next coal in the stocking one ... I'll actually recategorize this one. This is the present that your grandma gave you which, if she had given you five years ago when you really wanted it, you would have loved it but she's like five years late to the thing. You're like, "Oh, thanks Grandma ... I know you really thought and tried hard."
That is oil and gas producers in the United States that have taken out a ton of debt to actually make it happen. Three or four years ago, anybody that looked in this space said, "Oh, this is awesome! They're growing so fast and yes, they're taking on a little debt to do it, but oil prices are great!"
Now all of a sudden oil's at $60 a barrel and everyone's going "Oh, shoot. Maybe this was not the best idea in the world."
Crowe: You have that dynamic going on and, based on right now, you're probably going to see a couple of those smaller, really leveraged companies taking on a ton of debt really have to take a hard look in the mirror like, "Can we actually do this?" and maybe even look to be bought out or even ... who knows?
Reeth: Who knows?
Crowe: We might even see somebody do something worse.
Reeth: Coal stocks. All right. Anything else on there?
Crowe: Yes. Loud noises gifts.
Reeth: Loud noises gifts?
Crowe: Loud noises. You know the one that parents buy for the kids and they immediately regret because it makes a ton of noise and they're like, "Oh, it's so obnoxious."
Reeth: The drum sets.
Crowe: The drum sets. These are the companies that, if you were to get it for somebody they're going to talk about it incessantly for months upon months because they're worried about it. It's a good company, but they're afraid if they want to hold onto it any longer.
Two that are in that category right now are Seadrill (NYSE:SDRL), a rig owner. They have some of the best assets in the business, but quite possibly the worst balance sheet in the business so there's that dynamic of, "Can they hang on for the next thing?"
Some people will say, "Yes, they're going to be great in 20 years!" but people looking at it in two, three years are going, "Oh boy, that debt looks pretty questionable."
Crowe: Then the next one is frack sand producers in the United States; people who actually are delivering sand to make hydraulic fracturing possible. They've been completely dependent on oil and gas activity, and if prices plunge and then demand drops down a little bit, people are starting to look at that and go, "Oh, this is going to look kind of rough."
Again, long term looks awesome, short term a little rough and probably they won't stop talking about them.
Reeth: Drum sets, coal, underpants. It's everything you want in an energy podcast!
Reeth: Fantastic. Thank you, man. Thank you for coming in on Christmas, obviously.
Crowe: Yes. We are very dedicated to this.
Crowe: We had to be here for Christmas.
Reeth: Absolutely, absolutely. Merry Christmas to you Fools out there. Merry Christmas, Tyler Crowe. If you want more great stock ideas, head on over to Fool.com when you're done avoiding your family for the holidays. For right now, Merry Christmas, everyone!
Mark Reeth has no position in any stocks mentioned. Tyler Crowe owns shares of Enterprise Products Partners, National Oilwell Varco, and Seadrill. The Motley Fool recommends Enterprise Products Partners, National Oilwell Varco, and Seadrill. The Motley Fool owns shares of National Oilwell Varco and Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.