If you’re an investor who doesn’t mind a bit of risk, beaten down energy stocks offer prime opportunities for growth and income, if you know where to look.
Energy prices have been volatile in 2020, and with the current economic situation, that’s unlikely to change anytime soon. COVID-19 fears have decimated the travel industry – and the oil industry which fuels it. Resurgence fears have contributed to volatility With so much inherent risk in the industry right now, energy investors should consider the most reliable stocks within the sector by looking for companies which offer a diverse mix of income from dividends as well as future growth. These three energy companies minimize dependence solely on commodity price and offer solid dividend yields.
ExxonMobil (NYSE:XOM)
ExxonMobil has been paying a dividend since it was formed through the merger of Exxon and Mobil in 1998. Since then, it’s increased that dividend every year. If you factor in pre-merger dividends, the company has rewarded investors with annual payout increases for the last 37 years.
That makes ExxonMobil a Dividend Aristocrat, and it has one of the best track records in the energy industry. Luckily for investors, that commitment to the dividend looks set to continue, even in this era of sharply lower oil prices. The company has announced a 30% reduction in its 2020 capital spending budget to free up cash to devote to its dividend. If that’s not enough, Exxon can always rely on its strong credit rating and solid balance sheet to keep the payout funded until oil prices recover.
With an attractive current dividend yield of 7.38% (compared to the Oil and Gas – Integrated – International industry’s yield of 3.85%) and a solid balance sheet and payment history, ExxonMobil looks like a solid play at its current low share price.
Energy Transfer LP Unit (NYSE:ET)
Energy Transfer LP is a leading midstream company in North America that provides a large amount of the pipeline infrastructure necessary for the movement of crude oil and natural gas from the producing regions to refineries. The assets it owns will be needed, no matter what and replacing these assets is almost impossible for potential new market entrants. ET proves essential as the US aims for its goal of energy independence. In fact, it is necessary that midstream companies build out their infrastructure further going forward. One forecast sees a need for $500+ billion of additional midstream investments over the coming 15 years pointing to strong potential gains in the years to come.
Energy Transfer is yielding 15.7% right now which is the highest yield in its peer group by far. Ongoing yield spread normalization could result in share price upside for Energy Transfer relative to its peers, and even in the bearish/ conservative scenario that Energy Transfer would cut its dividend by 40%, its payout would be covered almost three times over, and yet its dividend yield would still be north of 9%.
Factor in share price gains in the long run, due to deleveraging that will allow for cash flow growth (lower interest payments) and due to growth from new projects and rate increases. With share prices still down 30% YTD, now may be an opportune time to buy for income-focused investors.
Valero Energy (NYSE:VLO)
Valero has not been immune to Coronavirus turmoil ever present in the oil industry. According to the International Energy Agency (IEA), 57% of global oil demand is determined by mobility, which has been significantly affected by lockdowns imposed to slow the spread of the pandemic. As one of the world’s largest independent oil refiners Valero’s share price is dependent more on refining margins than the specific price of crude oil.
Valero’s main business is its petroleum refineries, which contributed 95% of revenue in 2019. It also owns 14 ethanol plants and operates Diamond Green Diesel, North America’s largest renewable diesel plant, in a joint venture with Darling Ingredients. Though currently small relative to petroleum, revenue from the growing biodiesel segment increased 80% year-over-year in 2019.
The company’s share price has recovered from recent lows, but it still sells near its lowest level in three years. And thanks to consistently increasing dividends, it has an impressive 5.8% yield.
These three companies offer relatively high yields and all have a high potential for future growth. While the share price of each has risen from recent lows, looking forward should give investors less uncertainty and more security for collecting solid dividends. No single sector should be overweight in any portfolio. For exposure in the energy sector, investors should look at buying any or all of these three right now.
