It may seem hard to believe, but the current chaos in the energy sector, and oil stocks, in particular, will pass. The novel coronavirus that has birthed a global pandemic is being compared to the Spanish Flu of 1918.
Of course, when you have once in a century event, it’s difficult to look back in history and make an apples-to-apples comparison to our current situation. This isn’t to minimize our current situation. It’s simply to say that the market is forward-looking, but it’s also emotional. And it also hates uncertainty.
In a typical economic downturn, demand decreases, and investors are advised to “buy the dip.” But in the current environment, demand has been destroyed. Millions of Americans are being asked, and in some cases ordered, to stay home. And this simply means that oil demand is down. And investors are looking at prices that are, in some cases, at all-time lows.
The trading app Robinhood is frequented by millennial investors. And according to the latest information, many investors are trying to buy the dip on old guard oil stocks. That may be a mistake.
But the energy sector is about more than just oil stocks. There are several companies that are holding their own in the current environment. And that means when the economy opens up, these companies will be well-positioned for further growth.
Currently, the volatility and uncertainty surrounding energy stocks make them a poor choice for growth investors. However, many of these companies in this presentation offer a secure dividend that, along with the potential for capital appreciation, can make them a solid play for income investors.
Quick Links
- Brookfield Infrastructure Partners
- Brookfield Renewable Partners
- Viper Energy
- Enbridge
- Enterprise Product Partners
- Magellan Midstream Partners
- NextEra Energy
#1 - Brookfield Infrastructure Partners (NYSE:BIP)
Brookfield Infrastructure Partners (NYSE:BIP) is a way to invest in the volatile energy sector without having exposure to drilling and exploration. The company owns and operates utilities, transport, energy, and data infrastructure businesses. This includes natural gas pipelines that provide stable cash flow regardless of economic conditions. In fact, according to Brookfield only about 5% of its cash flow carries a recession risk.
Brookfield Infrastructure Partners is a subsidiary of Brookfield Asset Management (NYSE:BAM). They have a strong balance sheet. Not only does this give the company the ability to survive the coming recession, but also to potentially make acquisitions as market conditions allow.
The company has been reviewed by 10 analysts in the last year and has a consensus Buy rating. The analysts give the company a consensus price target of $51.10 that would be a gain of over 35% from the stock’s current level. The company is also a solid dividend stock. It’s grown its dividend every year for the last 10 consecutive year and has averaged 7.31%.
About Brookfield Infrastructure Partners
Brookfield Infrastructure Partners L.P. owns and operates utilities, transport, midstream, and data businesses in North and South America, Europe, and the Asia Pacific. The company's Utilities segment operates approximately 2,900 km of electricity transmission lines; 4,200 km of natural gas pipelines; 8.1 million electricity and natural gas connections; and 0.6 million long-term contracted sub-metering services.
Read More - Current Price
- $34.18
- Consensus Rating
- Buy
- Ratings Breakdown
- 5 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $40.20 (17.6% Upside)
#2 - Brookfield Renewable Partners (NYSE:BEP)
Another company within the Brookfield portfolio that looks to be a solid play in the energy sector is Brookfield Renewable Partners (NYSE:BEP). As its name states, Brookfield Renewable Partners is one of the leaders in renewable energy. Specifically in the case of BEP its hydroelectric power, which accounts for approximately 75% of the company’s current capacity.
While being a part of the larger Brookfield Asset Management family, it is a solid entity in its own rite. They have a market cap of nearly $8 billion which gives them ample room to take on large projects and acquisitions. One such example is the company’s bid to buy TerraForm Power (NASDAQ:TERP) a solar and wind energy provider.
If successful, the acquisition would reduce the company’s reliance on hydroelectric power by approximately 20% (60% from 75%). To that end, the company already has two projects in its pipeline for 2020 which is projected to add approximately $2 million to the company’s funds from operations (FFO). These projects are expected to increase over time.
About Brookfield Renewable Partners
Brookfield Renewable Partners L.P. owns a portfolio of renewable power generating facilities primarily in North America, Colombia, and Brazil. The company generates electricity through hydroelectric, wind, solar, distributed generation, and pumped storage, as well as renewable natural gas, carbon capture and storage, recycling, cogeneration biomass, nuclear services, and power transformation.
Read More - Current Price
- $24.98
- Consensus Rating
- Buy
- Ratings Breakdown
- 7 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $31.78 (27.2% Upside)
#3 - Viper Energy (NASDAQ:VNOM)
An asset light approach such as that taken by Viper Energy (NASDAQ:VNOM) is a safe way to play the current energy market. In the case of VNOM, they buy land that is rich in oil, specifically the Permian Basin. This gives the company a reliable revenue stream. In fact, Viper’s cash and cash alternatives are over 5 times its current liabilities.
The company’s debt is just over 20% of its assets and the debt that it does have doesn’t even start maturing until 2022. That should allow the company to weather the current crisis. Of course Viper does face the potential of having companies slow production or abandon their wells altogether. Is that possible? Sure. Is it likely? That’s less likely. Viper’s primary customers are companies with a long history in drilling and exploration. Viper also has the backing of Diamondback Energy (NASDAQ:FANG).
Viper is a relatively new stock. But it has generated two consecutive years of dividend growth.
About Viper Energy
Viper Energy, Inc owns and acquires mineral and royalty interests in oil and natural gas properties in the Permian Basin, North America. Viper Energy Partners GP LLC operates as the general partner of the company. The company was formerly known as Viper Energy Partners LP and changed its name to Viper Energy, Inc in November 2023.
Read More - Current Price
- $54.01
- Consensus Rating
- Buy
- Ratings Breakdown
- 8 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $51.63 (4.4% Downside)
#4 - Enbridge (NYSE:ENB)
The current collapse of oil prices is two-fold. First, there is a crisis of supply and demand. In this case, there is far too much supply and far too little demand. Second there was a pricing war between Russia and Saudi Arabia. With this in mind, it’s unrealistic to expect that pipeline volumes won’t be affected in some way.
Nevertheless, companies like Enbridge (NYSE:ENB) are somewhat insulated from those problems. Virtually all of the company’s cash flow (98%) is derived from the stability of instruments such as fee-based contracts that allow them to get paid even if demand is contracted. And, the vast majority of the company’s shippers have investment-grade credit ratings which means that they usually pay their contracts.
When you combine that with the strength of Enbridge’s own financial strength, you can look at the dip in the country’s share price as an opportunity. Enbridge has an investment-grade credit rating and a low leverage ratio. The company also offers an attractive dividend that has been increasing at an average rate of nearly 10% for the last 8 consecutive years.
About Enbridge
Enbridge Inc, together with its subsidiaries, operates as an energy infrastructure company. The company operates through five segments: Liquids Pipelines, Gas Transmission and Midstream, Gas Distribution and Storage, Renewable Power Generation, and Energy Services. The Liquids Pipelines segment operates pipelines and related terminals to transport various grades of crude oil and other liquid hydrocarbons in Canada and the United States.
Read More - Current Price
- $42.79
- Consensus Rating
- Hold
- Ratings Breakdown
- 0 Buy Ratings, 4 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#5 - Enterprise Product Partners (NYSE:EPD)
Enterprise Product Partners (NYSE:EPD) is a midstream infrastructure provider (MIP) that is engaged in the process of getting oil from the oilfields and into the market. Right now, that may seem fairly irrelevant. After all, the primary problem of the moment is that there is too much supply and not enough demand. But, this will not always be the case. At some point, the supply/demand imbalance will correct itself. And that should leave EPD in a good position. The company is continuing to invest in its future. It recently announced it will be working with Enbridge on a deepwater oil expert terminal in the Gulf of Mexico.
Like others in the sector, the company’s stock was hit hard by the market selloff. But like many energy stocks, it may be staging a slow but steady return to normal. When you consider that, even with the recent market volatility, the company’s annual equivalent return over the last 20 years is 12.7%, you are dealing with a well-managed company. As further evident of that, the company has paid an increasing dividend for the last 21 consecutive years.
About Enterprise Products Partners
Enterprise Products Partners L.P. provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals, and refined products. It operates in four segments: NGL Pipelines & Services, Crude Oil Pipelines & Services, Natural Gas Pipelines & Services, and Petrochemical & Refined Products Services.
Read More - Current Price
- $31.79
- Consensus Rating
- Buy
- Ratings Breakdown
- 10 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $34.00 (7.0% Upside)
#6 - Magellan Midstream Partners (NYSE:MMP)
Another company operating in the MLP sector is Magellan Midstream Partners (NYSE:MMP). The company puts its focus on refined products like gasoline, diesel, and jet fuel. Right now, that’s a tough proposition. However, refined products will be in higher demand as the economy opens up.
Magellan does not have quite as strong a balance sheet as other companies in this presentation. The company’s debts are 57.8% of its assets. However, it is a capital-intensive company that is considered essential to the U.S. economy. The good news is that the debt is in the form of bonds with long maturity dates and it has two major credit lines.
The company does have a solid history of delivering strong returns to shareholders. The average equivalent return since 2001 is 17.1%. The company also has increased its dividend for 10 consecutive years with an average dividend growth rate of 5.28% in the past three years.
About Magellan Midstream Partners
Magellan Midstream Partners, L.P. engages in the transportation, storage, and distribution of refined petroleum products and crude oil in the United States. The company operates refined products pipeline that transports gasoline, diesel and aviation fuel, kerosene, and heating oil to refiners, wholesalers, retailers, traders, railroads, airlines, and regional farm cooperatives; and to end markets, including retail gasoline stations, truck stops, farm cooperatives, railroad fueling depots, military bases, and commercial airports.
Read More - Current Price
- $69.00
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#7 - NextEra Energy (NYSE:NEE)
Of course, one alternative to investing in oil stocks is to invest in renewable energy. And that takes you to NextEra Energy (NYSE:NEE). NextEra derives income from being one of the nation’s largest electric utilities as well as being a world leader in wind and solar power. Because of their regulated rates and fee-based contracts, the company enjoys a predictable and stable income.
Despite the turbulence in the energy sector, NextEra is flat for 2020. And taking a wider view, the stock is up over 25% in the last 12 months. It also has a reliable dividend that is protected by one of the more conservative payout ratios in the industry. Although the stock is close to its consensus 12-month price target, NEE still gets a buy rating from analysts.
As of this writing, NEE stock was pushing up against what appears to be a level of resistance at around $235 per share. If the stock can break through this level, it could signify a new leg up. Even if it doesn’t, investors can pickup a nice dividend.
About NextEra Energy
NextEra Energy, Inc, through its subsidiaries, generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America. The company generates electricity through wind, solar, nuclear,natural gas, and other clean energy. It also develops, constructs, and operates long-term contracted assets that consists of clean energy solutions, such as renewable generation facilities, battery storage projects, and electric transmission facilities; sells energy commodities; and owns, develops, constructs, manages and operates electric generation facilities in wholesale energy markets.
Read More - Current Price
- $76.87
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 7 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $86.54 (12.6% Upside)
Right now may seem like a difficult time to invest in the energy sector. Particularly if you’re only looking at oil stocks. A newsletter that I subscribe to wrote the following description for the current situation in the oil sector:
No one wants to be stuck taking physical delivery of oil without a place to store it.
In a multibillion-dollar game of "hot potato"... professional traders and speculators who held the May futures contracts – what's known as the "front month" contracts – wanted to dump that obligation ahead of expiration. They were willing to sell it at any price... But they couldn't find anyone to accept that burden.
However, the market did what the market tends to do. And at the time of this writing, WTI crude had reached a high of $17.95. And longer-dated futures contracts are trading in the $20 to $25 range. That’s not enough to make many oil stocks profitable, but it’s consistent with the slow, measured approach that it seems like the U.S. will take as they seek to re-open the economy.
Still, energy stocks, and oil stocks, in particular, are likely to be depressed for quite some time. And it’s a real possibility that some companies may not make it to the other side. And that’s why energy stocks are a poor choice for growth investors right now.
However, if you’re an income investor, there are some smart ways to invest in the energy sector. By sticking to stocks such as the ones in this presentation, you can protect, and even grow, your portfolio.
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