To say that prices for oil and gas (and pretty much all commodities, for that matter) have been on a roller coaster ride over the last 18-plus months would probably do actual events a disservice. After all, it's not often that a multitrillion-dollar industry, one that is vital to the modern economy, suffers what amounts to an all-out depression. True, we are still using oil and natural gas to fuel our cars and power our homes. That hasn't been the problem. At the heart of the matter is a good old-fashioned supply-and-demand problem. Specifically, there's too much of the former. This appears to be working itself out -- as many things in economics do. OPEC is beginning to talk of doing something to get prices up, and oil producers the world over are making gargantuan cuts to capital spending and exploration budgets.
That is where we find ourselves today: bloodied, bruised, but not without hope as the oversupply that set current events in motion is potentially about to roll over. Fool readers are no doubt aware that, historically, some of the best times to buy are when, as the saying goes, there is blood in the streets. With so much red flowing on the income statements of oil producers, coupled with the possibility that supply is about to experience a pullback, it might just be the time to step up to the plate and take a few swings.
Here are three energy stocks to get venturesome investors started in the month of April.
While most oil companies spent last year spending every dime they could cobble together to grow oil production, EOG Resources (NYSE:EOG) spent the year working on improving its drilling returns. The results have been nothing short of impressive, with the company's focus on efficiency and innovation enabling it to develop a vast inventory of premium drilling locations that are still profitable at a $30 oil price.
As that slide notes, not only are these wells solidly economic at current oil prices, but they'll be wildly profitable if prices rebound. That sets the company up to have a really robust future when industry conditions improve.
Currently, about a quarter of EOG Resources' future drilling locations are of the premium variety, giving the company more than a decade's worth of drilling potential at its current drilling pace. In addition to that, the company has vast upside should oil and gas prices head higher, with the company controlling an even larger inventory of lower-quality locations that would become viable at higher prices.
Bottom line, EOG Resources is not only built to handle the low oil prices of today, but whatever the oil price is in the future. That's what makes it a compelling oil stock to consider this month, because unlike most of its rivals, it doesn't need to focus on its survival. Instead, thanks to a strong balance sheet and low costs, it can focus all of its attention on putting itself in a position to thrive when conditions improve, which just might be right around the corner.
Few companies in the oil and gas industry have the ability to perform well in every part of the demand cycle, and Phillips 66 (NYSE:PSX) is by far my favorite among this select group. It's also an excellent oil stock to buy now.
To start, the company's refining and marketing segments continue to drive the majority of the company's earnings and cash flows. And while oil prices have been sharply down for the better part of two years now, Phillips 66 has remained very profitable:
Revenue has fallen sharply, but that's a product of lower selling prices for the company's refined products. At the same time, Phillips 66 has paid much less for the crude it buys to make those products from. Hence net income remains very strong, even as the downturn in oil prices has driven down revenue.
Furthermore, management isn't banking on refining being a cash cow forever. The big long-term opportunity for Phillips 66 is in its midstream and chemicals businesses, largely due to plentiful and cheap domestic natural gas supplies. The company is investing in growing those businesses, which will net better returns on capital than building new refineries, and could eventually eclipse the refining business on its income statements.
Lastly, shares of Phillips 66 cost about the same today as they did when oil was $100, and the business has shown itself to be downturn-proof. Add in strong dividend growth and an aggressive share buyback program, and it's obvious why Phillips 66 is an excellent oil stock to buy this month.
When the markets punish broad sectors, skittish investors frequently throw the baby out with the bathwater. One of the extreme examples of this phenomenon in the energy sector's decline has been the selloff of Kinder Morgan (NYSE:KMI), a stock I recommend you take a closer look at this month.
Kinder Morgan is one of the largest energy infrastructure (read: pipeline and distribution terminal) owner-operators in North America -- if not the largest. While it is not primarily an oil and gas producer (it does own some fields in West Texas), Kinder Morgan's assets are vital to the industry itself. It owns or operates (according to its presentation at the March 9 Energy Fundamental Conference) 69,000 miles of natural gas pipelines; transports 2.1 million barrels of petroleum products every day; and is the largest independent terminal operator in North America.
Obviously, Kinder Morgan shares have taken a bit of a hit over the last 18 months, as depressed commodity prices have taken a toll (to put it mildly) on its customers. But for Kinder Morgan, specifically, it looks more like a case of guilt by association than real trouble. The company's cash flow, secured by long-term transportation contracts (which would, granted, go away if the entire industry went belly-up tomorrow) remains strong. For the three-month period that ended Dec. 31, Kinder Morgan generated $1.77 billion from operations, and spent $978 million in capital expenditures, yielding free cash flow for just the last quarter of 2015 of $792 million.
Its languishing share price over the last 12-plus months has been more a function of capital flowing out of the energy industry in general (thus depriving Kinder Morgan of financing to continue its expansion projects) than of actual concerns regarding its profitability. Kinder Morgan's proposed merger with its partially owned subsidiaries (which included Kinder Morgan Energy Partners) further complicated matters in this regard last year.
The bottom line for long-term Foolish investors is this: Kinder Morgan's depressed stock price is a reflection of how the market has been treating any and all energy-related enterprises, not a reflection of true concerns about its long-term viability. True, Kinder Morgan had to cut its dividend (in order to fund its capital spending in a world where raising capital from Wall Street has become tricky for energy companies) but it's hard to imagine the payout not being reinstated once current pressures subside. Beyond that, recognize that insiders eat their own cooking at Kinder Morgan HQ -- they own 14% of the company, including founder Richard Kinder's 10.99% stake -- and that Warren Buffett's Berkshire Hathaway just bought in, and you've got a great lead on an energy stock to buy in April.
Jason Hall owns shares of Kinder Morgan and Phillips 66. Matt DiLallo owns shares of Kinder Morgan and Phillips 66. Matt DiLallo has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool owns shares of EOG Resources, and has the following options: short June 2016 $12 puts on Kinder Morgan. 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.