Wall Street might be on vacation, holding fast to their "sell in May and go away" mantra, but we're still on the lookout for compelling stocks to buy this summer. In fact, we've uncovered three really cheap energy stocks have been unfairly sold off by the market. Read on to find out which three energy stocks we think are great buys this July.
Bob Ciura: I believe European integrated energy giant BP (NYSE:BP) is a great stock to buy this month, for a few reasons. First, shares of BP have been beaten down in the past year, not surprisingly due to the crash in oil and gas prices. Over the past 12 months, BP stock is down 25%. But I believe this has opened up an excellent buying opportunity, because BP is cheap and its dividend yield has spiked.
At $39 per share, BP stock trades for 1.1 times book value and 5 times enterprise value to EBITDA. And, thanks to its declining stock price, its dividend yield has been elevated to 6%. This is a very attractive valuation and dividend profile. While BP's earnings have been hurt by lower commodity prices, but there's reason to believe BP can weather the storm.
First, it's important to remember BP is an integrated company. Unlike exploration and production companies that are entirely reliant on supportive commodity prices, BP has a large refining business that actually does better when oil prices fall. BP's downstream profits more than doubled last quarter, to $2.2 billion. This helped offset an 86% decline in upstream profits.
Plus, BP has finally settled on the civil trial pertaining to the 2010 Gulf of Mexico oil spill. BP will pay $18.7 billion. This includes a $5.5 billion civil penalty to the United States under the Clean Water Act, $7.1 billion to the United States and the five Gulf states for natural resource damages, $4.9 billion to cover economic and other claims made by the states, and lastly up to $1 billion paid to 400-plus local government entities.
This is a major step forward for BP and its shareholders. The payments will be spread out over 18 years, so the fines are entirely manageable. And, now that investors know exactly what the settlement will be, investors are relieved of a huge lingering uncertainty hanging over BP's head.
Jason Hall: One of the few segments of the oil and gas business that has been relatively safe for investors over the past year has been pipeline operators:
The reason why? Natural gas liquids.
While most pipeline operators see minimal impact from the price of commodities on their revenues – which are typically fixed-fee "toll booth" charges – ONEOK Partners (which owns all of the assets, but is controlled by and partly owned by ONEOK) counts on NGL gathering for about 25% of its business, and these contracts are tied to the price of NGLs like ethane, propane and isobutane:
NGLs are a byproduct of natural gas production, which is booming. In short too much supply is killing prices, and ONEOK Partners is feeling the pinch. As fellow Fool Tyler Crowe described, this is putting its distribution at risk, and of course this puts both the incentive distribution ONEOK gets as the general partner, and the distribution it gets for the shares it holds, at risk of getting cut.
However, ONEOK Partners would have to cut its distribution pretty significantly before it reduced the percentage that ONEOK gets as general partner, so this reduces the potential risk for ONEOK shareholders. Furthermore, ONEOK has been increasing its cash position in recent quarters, building up some dry powder in part to help it navigate the low-commodity price environment.
Add it all up, and ONEOK Partners may have to cut its payout if NGL prices don't bounce back, but it looks like ONEOK is less likely to have to cut its payout if that happens. There is risk for both, but it looks like ONEOK is taking a bigger beating for something that would affect its shareholder less than those of ONEOK Partners.
Matt DiLallo: Chevron (NYSE:CVX) is starting to look ridiculously cheap right now as its stock is down almost 28% over the past year. That's a steeper share price decline that either ExxonMobil (NYSE:XOM) and BP over that time frame. Further, because of that steeper decline Chevron is now cheaper than both on a relative basis as measured by its P/E ratio and EV-to-EBITDA.
That cheap stock price aside, what makes Chevron such a compelling buy is the fact that its one of the best run oil companies in the world. It's a returns driven organization and as the chart below shows its second only to ExxonMobil on returns among big oil companies.
Further, it has the second lowest leverage ratio among its big oil brethren, bested only by the Triple-A rated Exxon. However, where it does top Exxon is in its dividend yield as Chevron currently yields 4.6%, while ExxonMobil's dividend yield is 3.4% as Exxon has favored returning capital to shareholders via stock buybacks in the past, which are currently suspended due to the lower oil price.
When we add it all up there is a case to be made for both Exxon and Chevron as great buys right now. However, Chevron is the stock that tops my list right now as its cheaper and pays a very generous dividend that's not likely to be cut.