What can you say about a market that’s barely budged the past three months?
Not a lot.
That is, unless you’re into international conspiracy theories, the strange phenomenon of negative prices, bin-busting supply gluts and dividend yields that are three or more times the norm.
Those eclectic forces have all played out in the energy patch this year, where our correspondent has uncovered several pockets of opportunity for patient investors.
Consider this Part One of Wealth Protection Research’s “Buy Low / Sell High” blueprint to energy profits. We’ll let you know when it’s time for Part Two.
— Bob Bogda, Editor
P.S. Like what you see? Don’t like what you see? Let me know.
I’m still trying to wrap my head around the rout in global energy markets this past spring.
Look, #2020. I get it. But negative prices?
At the April low, the soon-to-expire crude oil futures contract actually traded below zero. This meant that someone who was holding a contract for the physical delivery of 1,000 barrels of crude oil at a given price was willing to pay you to take it off their hands. Honestly, I never even thought that was possible.
Here’s what it looked like:
So, that was then. What is now?
Oil has recovered from those levels, of course. In the last three months, prices have fluctuated in a narrow band between the high $30s and low $40s. It’s a sideways pattern that I expect will continue for a while.
The spring slaughter of global oil prices was triggered by a price war between Saudi Arabia and Russia.
The greater conspiracy theory is that the price cuts were conceived and executed in concert to put American shale producers out of business. The resulting defaults and bankruptcies would in turn lead to reduced U.S. oil production and higher prices down the road.
But, alas, as perversely brilliant as that plot sounds, the truth is that both Russia and Saudi Arabia have extremely lopsided economies that are too dependent on oil production. For them, cash flow is much more important than price.
Since then, both countries have agreed to production cuts that have stabilized global oil prices. But there’s still a supply glut that will weigh on prices in the near term. There’s also a boatload of global economic uncertainty due to the global COVID-19 pandemic. Until there is better visibility regarding a vaccine or treatment, demand will stay low, as will prices.
Against that backdrop, is it possible to make money nibbling at energy-related stocks?
Yes. But selection is the key. Here are some ideas to consider:
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Valero Energy (VLO) — With a $21.4 billion market cap and nearly $90 billion in annual sales, Valero is one of the more interesting energy companies on my radar. Primarily an independent petroleum refiner and ethanol producer, Valero’s asset portfolio also includes marketing and retail distribution as well as midstream logistics, storage and transportation — an energy segment that is a little less susceptible to swings due to the price of oil.
By focusing on refining and distribution rather than exploration and production (E&P), the company sports a solid balance sheet with a 38% long-term debt-to-capitalization ratio (very low for this space) as well as $1.1 billion in annual free cash flow. The stock currently trades around $53 with an attractive 7.14% dividend yield.
Exxon Mobil Corp (XOM) — Once the world’s most valuable company based on market capitalization, the folks who made a reputation putting a tiger in your tank have taken some lumps lately, including being kicked out of the Dow Jones Industrial Average this week. But I’d still own the stock any day.
Down 47% from its 52-week high and recently bounced from the S&P 500’s top 10 biggest companies since the index’s inception 90 years ago, this American industrial titan may be down, but it’s definitely not out. Due to the current oil supply glut, fortune does not favor E&P companies. However, their business is not shut down by any means.
Exxon management has slashed all capital expenditures in order to buttress the company’s hallowed dividend. The balance sheet is also incredibly airtight with just 27% long term debt to capitalization and annual revenue of $213 billion. Oh, and did I mention that Dow components that have been removed from the index in the past decade have risen 10.4% on average over the following 12 months? Go figure.
Consider buying XOM shares at current prices and take advantage of a solid dividend yield of 8.53%.
Kinder Morgan, Inc (KMI) – One of the biggest and best-known names in the pipeline space, KMI operates and owns approximately 37,000 miles of pipelines and 180 storage terminals transporting and storing natural gas, crude oil, refined petroleum, and other energy products. Again, being a railroad, of sorts, gives KMI holders a little cushion due to the lack of actual linkage to energy commodity prices (although everyone tends to throw the baby out with the bath water when markets are falling out of bed).
The company converted to a C-corp a few years back, freeing investors and their accountants from the seemingly endless wait for the annual K1 form issued when the company was organized as a master limited partnership (MLP) previously. Shares are off 39% from their 52-week high at just under $14 with a 1099-generating 7.4% distribution.
The outlook for oil is stable at best. Until demand catches back up with an abundant supply, prices will more than likely hold steady and churn sideways. This creates an ideal opportunity to pick up best-in-class companies at cheap prices and get paid to wait for prices to rise. As a basket, these three champs yield a collective 7.7%. Have you checked the interest rate on your bank savings account recently?
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