Alliance Resource Partners (ARLP) Q3 2021 Earnings Call Transcript
ARLP earnings call for the period ending September 30, 2021.
The energy sector produces and supplies fuels and electricity for the global economy. It includes companies involved in the following activities:
This broad industry is crucial to providing the economy with the energy it needs. It's also an important one for investors to understand.
Hundreds of public companies focus on the production and distribution of energy. However, a few leaders stand out because they’re larger in size and have strong financial profiles. Here are three of the top ones to consider:
|Company||Ticker||What it does|
|ConocoPhillips||NYSE:COP||Globally diversified oil and gas producer|
|NextEra Energy||NYSE:NEE||Leading utility and renewable energy producer|
|TC Energy||NYSE:TRP||Leading pipeline operator and electricity producer|
Source: Companies' websites
ConocoPhillips (NYSE:COP) is a diversified oil and gas producer. It has operations around the world and uses several methods to produce energy. The company operates deepwater wells, oil sands production complexes, LNG production and export facilities, and conventional (e.g., vertical drilling) and unconventional (e.g., horizontal drilling into shale formations using hydraulic fracturing) oil and gas wells.
The company also enjoys low-cost operations. It has an average cost of supply of less than $30 a barrel following its acquisition of fellow oil and gas producer Concho Resources in 2020.
ConocoPhillips complements its low cost of supply with a strong balance sheet. It has an investment-grade bond rating backed by a low leverage ratio and lots of cash. That provides it with plenty of cushion to weather periods of low oil and gas prices, which there were plenty of in 2020.
COVID-19 forced ConocoPhillips to alter its game plan in 2020 as oil prices plunged. However, the oil giant survived this downturn and came out the other side even stronger, thanks to its merger with Concho Resources.
NextEra Energy (NYSE:NEE) is one of the country's largest electric utility companies. It's also the global leader in producing power from the wind and sun through its energy resources segment, which sells clean energy to other utilities and end users around the country.
Both businesses generate relatively stable cash flow backed by government-regulated rates and fixed-price contracts on the power NextEra produces and distributes to customers. This business model has proven its resiliency during the COVID-19 pandemic. NextEra hasn’t suffered at all, thanks to steady electricity demand and rates.
The company also boasts one of the best balance sheets in the electric utility sector and also has one of the highest credit ratings in its peer group. The energy-producing company has a conservative dividend payout ratio for a utility, which adds to its strong financial profile. Those factors enable NextEra to pay a stable and growing dividend, making it an excellent renewable energy dividend stock.
One of the largest natural gas pipeline operators in North America, TC Energy (NYSE:TRP) has pipelines in the U.S., Mexico, and its home country of Canada. In addition, the company owns a premier liquids pipeline system, giving it status as one of Canada's leading oil exporters. It’s also one of the country’s largest power producers.
Those energy infrastructure assets generate relatively stable cash flows backed primarily by fee-based contracts and regulated rates. This low-risk business model has proven to be highly durable during COVID-19, as TC Energy continued to generate steady cash flows.
Meanwhile, the company pays out a conservative amount of its annual earnings via its dividend. It also has one of the top credit ratings in the pipeline sector. Those factors give it the financial flexibility to continue expanding its pipeline network while also making TC Energy one of the lower-risk companies in the energy sector.
The energy sector is a challenging one for investors, especially oil and gas companies. Energy prices can change in a heartbeat, which can have a massive impact on the sector, as well as on the global economy.
That became abundantly clear at the start of the COVID-19 pandemic. The outbreak shut down large portions of the global economy such as air travel and commuting to work, which torpedoed oil demand and pricing. This downturn weighed heavily on oil company stock prices, with some ending up worthless after several companies filed for bankruptcy.
Because of the impact commodity price volatility can have on the energy sector, investors need to understand how to invest in energy stocks. That includes keeping downside risk in mind by not allocating too much of a portfolio to one energy stock or the industry as a whole. Further, they should focus on companies unlikely to go out of business if industry conditions significantly deteriorate.
Factors that increase an energy company's durability include:
Energy companies with these characteristics will be in a better position to withstand inevitable economic downturns. That means they'll still be around when conditions improve. Furthermore, they'll have more flexibility than their weaker peers to capture opportunities that can create value for their investors.
The energy sector is vital to the global economy because it provides the fuel and power needed to drive trade and travel. However, when the economy slows, as it did during the COVID-19 pandemic, it can have a major impact on energy demand and prices. That can put significant weight on energy stock prices. Conversely, when the economy hits the accelerator, which started happening in 2021 as more vaccines rolled out to limit the pandemic, demand soars and usually takes prices up with it.
Because of that, investors should focus on the stocks of companies that can easily survive a downturn. That will also put them in the best position to thrive when market conditions improve. In addition, they should consider focusing more attention on cleaner energy companies using renewable sources. That’s especially important during the Biden administration, given its pledge to put the country on a path toward an emissions-free future.
A few leaders stand out because they’re larger in size and have strong financial profiles. Here are three of the top energy companies to consider:
ConocoPhillips: Globally diversified oil and gas producer
NextEra Energy: Leading utility and renewable energy producer
TC Energy: Leading pipeline operator and electricity producer
The energy sector is vital to the global economy because it provides the fuel and power needed to drive trade and travel. However, when the economy slows, as it did during the COVID-19 pandemic, it can have a major impact on energy demand and prices. That can put significant weight on energy stock prices. Conversely, when the economy hits the accelerator, which started happening in 2021 as more vaccines rolled out to limit the pandemic, demand soars and usually takes prices up with it. Because of that, investors should focus on the stocks of companies that can easily survive a downturn. In addition, they should consider focusing more attention on cleaner energy companies using renewable sources.
The best utility investments are companies with a top-notch financial profile and visible growth prospects. Each of the companies below meets those criteria and has the potential to produce above-average total stock returns -- dividend yield plus stock price appreciation.
Here is a list of standout companies, followed by our assessment of each investment:
American Water Works is the largest publicly traded water and wastewater utility in the U.S.
Brookfield Infrastructure Partners owns a diversified portfolio of infrastructure businesses.
NextEra Energy operates regulated electric utilities in Florida. It also owns a nonregulated competitive energy business that operates natural gas pipelines and renewable energy projects.
ARLP earnings call for the period ending September 30, 2021.
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