Thursday, June 25, 2020

The Oil & Gas Stocks That Are Still Worth Buying In 2020

The oil price collapse and a global drive toward sustainable investing have scared many investors away from oil and gas stocks. 


However, analysts believe that there are still some stocks in the industry that are worth investing in and holding, even after the second major oil price crash in five years and even amid growing calls for investors to dump fossil fuel stocks.  


Some stocks that have underperformed the broader market and failed to follow the most recent oil price rebound from when oil prices hit negative $37 a barrel in April could well be great buys as the oil market continues to rebalance.


There are also oil and gas firms out there that are sporting healthy balance sheets and are likely to keep their dividends intact despite the oil price rout that affected the finances of every single company in the space.


Then there are the energy firms that are shaping up to take advantage of the energy transition and the growing investor preference for environmentally friendly companies. It is these companies that adapt the fastest that will be the winners in a world pushing for low-carbon energy sources.


According to Barron’s, there are five oil and gas firms with “particularly healthy” balance sheets that may be capable of repeating their 2018-2019 strong earnings growth performance in the future, Avi Salzman writes. These are major firms ConocoPhillips and Canadian Natural Resources, as well a smaller companies Cabot Oil & Gas, refiner CVR Energy, and Illinois-based industrial company Dover, which makes equipment for the oil and gas sector.


ConocoPhillips and Canadian Natural Resources have also recently made Goldman Sachs’s list of stocks that are expected to benefit from an upcycle in oil prices.


Goldman Sachs added ConocoPhillips to its list due to its correlation with Brent Crude prices, stock underperformance, and its flexibility in oil production to prioritize cash generation.


“We are seeing micro/macro fundamentals bottoming and expect ConocoPhillips to be a strong participant in the upcoming oil price upcycle, given the level of underperformance relative to large-capitalization U.S. majors to date, as well as the company’s strong leverage to Brent,” Goldman Sachs analyst Neil Mehta said in a note in early May reported by TheStreet.


The same analyst also upgraded Canadian Natural Resources to “buy” from “neutral” in mid-May, citing sufficient liquidity to ride out the 2020 downcycle, capital spending expectations for next year, and a compelling valuation “with the stock trading at a 20%/25% free cash flow yield to equity on 2021-2022 estimates and 11%/15% on free cash flow yield to enterprise value.”


Dividends and dividend yields of oil and gas stocks may be compelling, but investors should also look at how sound the balance sheets are, Stewart Glickman, a senior equity analyst with CFRA Research, told Ellen Chang of U.S. News & World Report.


“It’s going to be a mix of keep/cut when it comes to dividends, but an energy investor’s first stop should be to look at the balance sheet,” Glickman says.


According to Tortoise Capital, midstream oil firms – which have also suffered in the oil price rout – could also be a good bet in the oil and gas sector.


“[T]he most notable reason why midstream has rebounded and can continue to go up is that the downturn in stock prices far exceeded the expected decline in cash flows of the companies,” James Mick, Managing Director and Energy Portfolio Manager with Tortoise, said earlier this month.


Finally, beyond the short-term stock performance in this volatile and certainly exciting year for many stock market speculators, investors are and will be increasingly looking at fossil fuel companies that can successfully adapt to the energy transition and make alternative, low-carbon, energy sources work for their profits and share prices.


“This is a story about aggregate demand trends; there will be isolated winners, the oil price will occasionally spike, but the industry is in a painful transition that seems unlikely to reverse,” Andrew Parry, Head of Sustainable Investment at Newton Investment Management, part of BNY Mellon Investment Management, wrote at the end of May.


In Europe, Big Oil has signaled it is moving toward Big Energy with pledges for net-zero 2050 emissions and increased investments in renewables and carbon capture projects. Time will tell if the new Big Energy will be attractive enough to lure wary investors back to the energy sector. 


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