What a year. It started with the novel coronavirus taking hold in China and spreading to Europe — and an initially modest economic impact. Then it spread to the United States and caused lockdowns. As a result, a severe drop in oil and gas demand threw oil stocks for a loop.
But it got worse. Saudi Arabia decided to have a hissy-fit with Russia and other oil-producing nations. This resulted in market calamities in the petrol markets like few others in history. It also included the contrived additional threat of a lack of storage for crude oil.
U.S. West Texas Intermediate Crude Oil (WTI)
The lack of storage capacity — particularly in U.S. markets — resulted in the rollover of futures contract pricing WTI. The benchmark for crude briefly briefly hit negative $37.63.
The combination of economic lockdowns and oil price war was devastating for many oil stocks from upstream (well-head) through midstream (pipeline and related entities) and downstream (refiners and distributors). And this shows up with the S&P Energy Index plunging from early January through a bottom in late-March.
S&P Energy Index
The result was that the index dropped by 61% very quickly. This made it one of the worst sectors in the overall S&P 500.
Since then, the Energy Index has rebounded — regaining some 58.6% in price. But it hasn’t been all good news for oil stocks. Many companies have filed for bankruptcy via Chapter 11. And others have shuttered wells and other operations to wait out the pandemic.
But the industry is one thing — individual companies are another. And many have been not just surviving, but thriving.
Doing Your Own Homework on Oil Stocks Pays Off
Earlier this year, I did a full review of each of the holdings inside the model portfolios of my Profitable Investing. And I did it from a position of what I call status. Status entails the ability of a company to sustain itself through the lockdowns and petrol crisis. This review started with credit. Does the company have cash and equivalents to service debts? Does it have access to credit lines and debt distributions that are well spread out?
And then status extended to maintaining each company including its employees, its suppliers and its customers. This helps determine not only that it could muddle through, but that it would be able to get back to profitability after the crises.
I ended up with three oil stocks that not only did I see as having good status, but good potential for income and growth through and past the lockdowns and price war. And from March 18 to date, these three have returned 51.4% to 103.7% with more on the table for further gains. Plus, they all have ample and rising dividend income. Here are three oil stocks I am recommending to buy right now:
Oil Stocks to Buy: Viper Energy (VNOM)
If you look in the archives of InvestorPlace, you’ll find my write-ups on Viper Energy going back to 2018. This company is in the upstream portion of the petrol market. But it doesn’t own a single drill, nor does it explore or produce a single barrel of oil or natural gas equivalent.
Instead, Viper Energy owns the land and mineral rights for very rich fields of the Permian Basin, which is predominantly located in Texas.
And it in turn leases out the land and allows exploration and production (E&P) companies to seek and produce oil and gas. They pay Viper rent and royalties along the way. Viper was initially a pass-through partnership that converted to a regular corporate taxed entity. And it was spun down from Diamondback Energy (NASDAQ:FANG) some years ago to monetize its land holdings for cash.
Viper Energy (VNOM)
The company has recently reported that nearly all of the well facilities on its properties are now back online with ample oil and gas production flowing. The company will be reporting for its second quarter on Aug. 3. But given guidance ahead of the release, the company should continue to be in good shape.
One of the key attributes of the company is that ahead of the mayhem, it rolled out a series of hedges against the price movements of oil and gas. These hedges provide potential off-sets from declining prices on royalty payments.
That said, production for the full first quarter resulted in revenue gains of 3.3%. And with no real capital expenditure costs for wells or equipment, the company really is just a cash machine. Operating margins are running at 64.9% making for lots of capabilities for both debt coverage and investor distributions.
Viper Energy’s Financial Position
Debts are very low at only 21.1% of assets. And it has 540% of cash and cash equivalent coverage of current liabilities running out to one year forward. This provides a whole lot of stability and capability in the market.
The company did move to retain more cash both for investment as well as for a cushion. This in turn meant that dividend distributions are now yielding 3.7%. That distribution level will likely hold steady through 2021. Then, we should see a rise in distributions for a higher yield.
Viper Price-Book Ratio
But what is really impressive is that the stock is trading at a discount to its intrinsic value. This makes for a bargain buy even as shares have returned 103.9% since March 18. I have it as a buy, ideally in a tax-free account under $12.
Enterprise Product Partners (EPD)
Enterprise Product Partners is one of the leading petroleum midstream pipeline and related asset companies in the U.S. With thousands of miles of pipe, it connects production fields to industrial, power, transport and distribution companies in and around the U.S.
The company is set to report for the second quarter on July 29, but it appears from various reports that demand for liquified natural gas (LNG) — as well as for crude for export — was better than expected. This will add to the company’s already steady demand for gas and other liquids from its commercial and utility customers.
Note, while renewable energy continues to expand in the U.S. and beyond, natural gas remains a necessity for continued power production alongside wind, solar and other green power production facilities.
The company was in a good status condition going into the market messes and it has taken steps to further strengthen its balance sheet with a reduction in capital expenditures to a still very positive level for growth at nearly $3 billion.
Enterprise Product Partners (EPD)
Enterprise has a history of dependable revenue from its toll taker pipes and related assets. Revenues over the past five years have been generally climbing on a compound annual growth rate (CAGR) of nearly 4%. This growth stems from a recent low back in 2016. That’s when the petrol market last wrapped up pricing challenges.
Enterprise Products Revenue
And the company has always been frugal on the cost side, resulting in operating margins running at a pretty fat level of 18.5%. Through the first quarter this has resulted in a return on shareholder’s equity of an impressive 19.1%.
Enterprise Product Partners’ Financial Position
As a heavy cash generator, the company tends to keep less on hand. Its current ratio (percentage of cash and equivalents against current liabilities out to one year) is now at 0.9 times. But, its debt is just 45.3% of assets. Plus, its assets are very hard to replicate.
And with newer pipes running into a blade saw of legal challenges, Enterprise’s pipes are arguably undervalued on a replacement cost basis.
As a pass-through, it avoids corporate taxes and passes through profits to unit holders with a current tax-advantaged yield of 9.7%. It does retain some earnings for further development — which as noted earlier are expanding, if at a more risk-controlled level.
Enterprise Price-Book and Price-Sales Ratios
But what makes the stock a buy isn’t just the dividend or the revenue and margins. It’s that it is valued so low. Enterprise Product Partners has a price-book ratio of 1.6 times and a price-sales ratio of only 1.3 times. These levels are still quite discounted despite the rebound in shares. EPD stock is a buy in a taxable account under $20.50.
Oil Stocks to Buy: Kinder Morgan (KMI)
The major peer of Enterprise Product Partners is Kinder Morgan Incorporated. KMI was founded and is run by the legendary Rich Kinder. Formally a pass-through, the company integrated its assets as a regular corporation to make it more attractive for institutional investors as well as others. It turns out many market participants prefer to avoid tax-advantaged pass-through companies and the related K-1 tax form filings.
The company owns and runs a vital collection of natural gas and related products that makes it the largest midstream company in North America. From gas to crude, Kinder is plugged into the leading production fields and customers throughout the U.S. It sold its major Canadian assets to avoid continued delays and legal fights.
And it is also a leading transporter and harvester of carbon dioxide (CO2) which meets environmental, social and governance (ESG) objectives and sets it up for credits and tax advantages going forward.
Kinder Morgan (KMI)
Kinder Morgan recently reported second-quarter results, and the company missed estimates. This is thanks to a drop in product demand as well as an overall slower economy. And like for Enterprise, it also has been proactive at reducing capital expenditures from $2.4 billion to $1.7 billion. And the company is planning to continue to increase dividend distributions if only at a lower rate of 5% against its planned 25% for 2020 — but that’s still a targeted increase which is welcome in the current market.
Revenue may be lower of recent, but the company has a long-term history of expanding it with the trailing ten years seeing revenue expanding at an annual rate (CAGR) of over 4%.
Revenue for Kinder Morgan
Kinder Morgan’s Financial Position
And like for Enterprise, Kinder runs profitably with operating margins at a whopping 36.9%. And as a cash machine, it does keep its current ratio a bit lower. But its credit is good and its debts are lower at 45.4% of assets. Plus, its pipeline assets are hard to replicate, making them arguably more valuable.
The dividend yield is ample at a current level of 7%, up by 19.1% over the trailing year. And even with the lesser targeted increases in the works, it is pledging to increase the distributions.
Kinder Morgan Price-Book and Price-Sales Ratios
The company and the stock are getting noticed with a return since March 18 to date of 51.4%. But it is still cheap with the stock valued at a mere 1.02 times book value and a still-low level of 2.6 times trailing sales.
I recommend buying KMI stock in a tax-free account under $17.25.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.