With sentiment towards oil and gas companies hitting record lows, trying to pick winners in the energy sector can be an onerous and thankless task at a time when fossil fuels are facing a crisis of perception.
Energy stocks are finding themselves in the penalty box due to heightened concerns about ever-rising carbon emissions and the rapid growth of socially-conscious investing, leading to capital fleeing the sector at an unprecedented rate. Over the past decade, the energy sector was easily the biggest laggard in the S&P 500, gaining just 34% over the timeframe according to Refinitiv data. In contrast, the next closest sector, materials, gained nearly 5x as much.
And so far, this unfortunate trend is showing no signs of abating.
The underperformance by the energy sector has carried over to the new year, with the sector’s favorite benchmark XLE down 9.5% YTD vs. 3.6% gain by the broad market benchmark.
With oil and gas prices once again in a bear market; the coronavirus outbreak severely depressing demand and investors cooling off on highly leveraged energy companies, more conservative oil and gas plays are more in favor at the moment.
The good news: some punters think the energy rout won’t last and an oil comeback could be on the cards in the current year, meaning the tide might eventually end up lifting all boats. But it’s going to lift some much more than others.
Here are three stocks for every risk level, large-cap, mid-cap and small-cap that could buck the trend in the oil comeback:
As the largest pure upstream company, ConocoPhillips Company (NYSE:COP) has performed relatively well in this depressed market, generating ample free cash flow and returning a good chunk of it to shareholders.
Unlike many of its peers who continued to expand aggressively during the shale boom, COP has taken several steps to lower costs and fortify its balance sheet leading to one of the best cash positions in the oil patch.
Although the company saw revenue contract 20.3% Y/Y to of $7.71B while adjusted earnings fell 36.5% to $831 million, the oil driller was still able to generate an additional $2.7B in free cash flow during the quarter and added $10B to its stock buyback program to bring the total allocation to $25B.
For the full year, COP generated $11.7B in FCF of which it returned 43% to shareholders and still managed to finish the year with a healthy $8.4B in cash and short-term investments, a 31.3% Y/Y increase.
Source: Company Investor Presentation
ConocoPhillips has been gradually offloading non-core assets, including the sale of its North Sea oil and gas assets for $2.7B and the planned sale of its Australian assets for $1.4B. Its asset portfolio, however, remains healthy.
COP has 13 Buy, 2 Hold and 0 Sell recommendations on TipRanks.
In contrast, integrated oil and gas company ExxonMobil’s (NYSE:XOM) CEO Darren Woods is showing no signs of backing off from the company’s aggressive expansion, even as the likes of BlackRock have made it clear that emissions reductions and addressing the climate issue remains the key issue raised by investors.
Blackrock, the world’s largest asset manager with $7.4 trillion in assets under management, recently joined the Climate Action 100+ that might see the firm push companies like XOM to set specific science-based emissions reduction targets.
Despite dwindling cash flow and returns, XOM has continued pushing hard to increase overall production with aggressive expansion efforts especially in Guyana.
BofA had a strong Buy recommendation for XOM at the beginning of the year citing, ‘‘The inflection in Permian production is well under way while the first oil from Guyana confirmed for December kick starts what we expect to be 7-8 years of growth…”
However, it was recently slapped with a Sell recommendation from Goldman Sachs for “...lack of free cashflow limiting capital returns, and risk to long-term return on capital employed (ROCE) targets.’’
With XOM stock trending downwards for six straight years, some see investing in the company akin to trying to catch a falling knife. XOM has 1 Buy, 9 Hold and 3 Sell recommendations on TipRanks.
Mid-Cap: Hess Corporation
Hess Corp. (NYSE:HES) is an E&P company that develops, produces, purchases, transports and sells crude oil, natural gas and natural gas liquids (NGLs). And even if you hadn’t paid much attention to Hess before, it’s probably already on your radar as the partner in Exxon’s wild offshore Guyana discoveries.
For the fourth quarter, Hess reported revenue of $1.68B (+1.8% Y/Y) while adjusted net loss widened to $180 million, or 60 cents per share from $77 million, or 31 cents per share, during last year’s comparable period. The company pinned the blame for the poor earnings on lower energy prices, with lower natural gas prices more than offsetting higher output from its Bakken shale assets.
Investors have not been pleased with the report, with the mid-cap now 20% from levels printed just three short weeks ago.
The selloff, however, appears overdone. During its earnings call, the company’s management revealed that it has 80% of 2020 production hedged at $55 to $60, or 5.3% above current Brent prices. Meanwhile, cash-flow and production have been exceeding expectations.
Diversified Oil Companies:
As one of the biggest names in energy, Suncor Energy (NYSE:SU, TSE:SU) has adopted a number of high tech solutions for finding, pumping, storing, and delivering its resources. Not only is it big in the oil sector, however, it is a leader in renewable energy. Recently, the company invested $300 million in a wind farm located in Alberta.
If the next shale boom truly is to be in the oil sands then giants like Suncor is sure to do well out of it. While many of the oil majors have given up on oil sands production – those who focus on technological advancements in the area have a great long-term outlook.
Total (NYSE:TOT) maintains a ‘big picture’ outlook across all of its endeavors. It is not only aware of the needs that are not being met by a significant portion of the world’s growing population, it is also hyper-aware of the looming climate crisis if changes are not made. In its push to create a better world for all, it has committed to contributing to each of the United Nations’ Sustainable Development Goals. From workplace safety and diversity to societal progression and reducing its carbon footprint, Total is checking all of the boxes that the next generation of investors hold close to their hearts.
Enbridge, Inc (TSX:ENB), based in Canada’s oil sands capital Alberta, is an energy delivery company focusing on transportation, distribution, and generation of energy. Operating in the United States and Canada, Enbridge owns and operates the largest natural gas distribution network in Canada and the longest crude oil transportation system in the world. Founded in 1949, investors can feel confident in Enbridge’s experience and market know-how.
Though not strictly dealing in commodities, Enbridge’s diversified assets and connections to a variety of industries position the company as solidified player in many Canadian investors’ portfolio.
TransCanada (TSX:TRP) is a major oil and energy company based in Calgary, Canada. The company owns and operates energy infrastructure throughout North America. TransCanada is one of the continent’s largest providers of gas storage, and owns and has interests in approximately 11,800 megawatts of power generations.
With TransCanada’s massive influence throughout North America, it is no wonder that the company is among one of Canada’s highest valued energy companies. Investors can feel comfortable with the company due to its huge and diverse portfolio, and continuing eye for success.
Franco-Nevada Corporation (TSX:FNV) specializes in securing precious-metal streams, but the company also works in the oil and gas industry. With key assets in some of North America’s most desirable oil and gas plays, including Texas, Oklahoma and Alberta, it is clear that the company has amazing potential in the coming years.
FNV ended 2016 with a relative bang. And as oil and gas prices inch up, investors are watching this diverse company very closely.
Cenovus Energy (TSX:CVE) is most known for its oil business, but it is also actively investing in renewable energy. More importantly, however, is that it has set truly ambitious sustainability goals for itself, aiming to cut emissions by a massive 30% in just 10 years.
This is one of the most actively traded stocks on the TSX. The potential is certainly here for this oil company, so for investors who are bullish on the return of the oil markets, this is a perfect pick in the Canadian market.
By. Joao Piexe