Stock Market Crash: 7 Energy Stocks to Buy on the Dip
Some energy stocks are poised to outperform.
Energy stocks took a beating starting in 2019, and many plummeted recently as the stock market dipped amid the coronavirus outbreak and a battle on oil prices between Russia and Saudi Arabia. As low crude oil prices linger, energy companies with clean balance sheets and manageable debt levels are worth a look. Thanks to the dip, investors who want to add energy stocks can buy them at a discount. "The companies that are going to outperform will be those with less exposure to high production costs or businesses that have already been forced to adapt to lower commodity prices," says Patrick Morris, executive vice president and director of Unicorn REH, a Dallas-based exploration and production company. Here are seven energy stocks to add to a portfolio.
Kinder Morgan (ticker: KMI)
Houston-based pipeline operator Kinder Morgan reported a profit of $2.2 billion for 2019, a 48% increase over the $1.5 billion profit from the previous year. The closing of the sale of Kinder Morgan's Canadian assets during the fourth quarter generated proceeds of $942 million. "My top pick is Kinder Morgan," Morris says. "They get paid to move products, and they pay a very respectable 6.23% dividend." Richard Kinder, founder and chairman of the company, bought 300,000 shares at an average price of $20.17 each for a total of $6.05 million on Oct. 29. The stock is trading at about $15 while its all-time high was $22.58. The company has $1.13 billion in cash and short-term investments and total debt of $34.7 billion as of December 2019.
Exxon Mobil Corp. (XOM)
Oil behemoth Exxon Mobil is known for its strong balance sheet and provides a dividend yield of 8.3%. Investors who wanted to buy Exxon stock but thought it was too expensive now have an opportunity since its price has dropped by 48% during the past year. The stock was trading at $62.70 on Feb. 5, but concerns over a contraction in the economy and less global travel tanked crude oil prices, bringing its price below $40. XOM recently filed regulatory paperwork for an unspecified board offering for general corporate purposes. Exxon has $3.09 billion in cash. "They reiterated guidance on capital expenditure, so they will emerge in a solid position," Morris says.
Chevron Corp. (CVX)
Another oil major, Chevron still offers a sizable dividend yield of 6.22%. The company was considering slashing spending, which could result in lower production in 2020. It has $6.2 billion in cash, but JPMorgan analysts say the company's oil price needed to fund capital expenditures, dividend payout and share buybacks is $55 a barrel, while Barclays puts the figure at $54 a barrel. CVX executives recently told investors the company is positioned to cope with the current turmoil and collapse in oil prices and is not changing its expenditures of $19 billion to $22 billion annually through 2024.
Energy Transfer (ET)
Energy Transfer, a Dallas pipeline company, offers an extremely generous yield of 17.3%. The company reported a profit of $3.6 billion in 2019, a three-fold increase from 2018. The additional profit was generated from higher volumes of crude oil, natural gas and natural gas liquids transported in its 86,000-mile network of pipelines in 38 states. Energy Transfer CEO Kelcy Warren bought almost $90 million in shares on Feb. 19 and Feb. 27, according to regulatory filings, and another $45 million in shares in November. Wall Street views insiders buying shares of a company's stock as a positive sign. The stock is trading at about $7, compared with its 52-week high of $15.87. While the stock is volatile, "lots of risk is already priced in" the stock, Morris says.
EQT Corp. (EQT)
A Pittsburgh-based natural gas company, EQT is the largest gas producer in the U.S. Less production from oil fields will translate into a lower gas supply, but demand for natural gas and inventory storage was already priced in, Morris says. "Weather in the Northeast is basically sub-tropical for this time of year, so the risk is all priced in," he says. "I don't see a lot of downside and maybe a bit of upside in the commodity based on lower overall production as a residual byproduct of oil production." The company also has access to $1.4 billion of capital.
EOG Resources (EOG)
EOG Resources, a Houston-based oil and gas company, increased its natural gas liquids production by 17% and natural gas production by 15% year-over-year. The company also generated $1.9 billion in free cash flow, which gave it the ability to raise its dividend by 30% for the second consecutive year to a yield of about 3.8%. The stock is trading at near its 52-week low of $30.40. EOG Resources committed to maintaining strong balance sheets, and management will "curtail activity as necessary," according to notes from investment bank RBC Capital Markets.
Magellan Midstream Partners (MMP)
Magellan Midstream, a Tulsa, Oklahoma-based refined products and crude oil pipeline master limited partnership, pays a distribution yield of about 9%. Magellan raised its distribution by 4.3% in the most recent quarter, and CFRA analyst Stewart Glickman says the company should continue to grow distributions. Distributable cash flow, a financial measure that represents the amount of cash generated to pay distributions, reached a record $357.8 million for fourth quarter 2019 and was 18% higher than the $302.4 million generated in fourth quarter 2018.
Energy stocks to buy now:
-- Kinder Morgan (KMI)
-- Exxon Mobil Corp. (XOM)
-- Chevron Corp. (CVX)
-- Energy Transfer (ET)
-- EQT Corp. (EQT)
-- EOG Resources (EOG)
-- Magellan Midstream Partners (MMP)
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