It is exactly four months since the historic oil price crash that sent crude prices into negative territory for the first time ever. Since then, WTI and Brent prices have made a nice recovery journey to trading at five-month highs.
Optimism is slowly returning to the oil markets thanks to the deep OPEC + cuts and the latest report showing that producers have mostly sticking to their promise cuts. Meanwhile, the chances of finding a Covid-19 vaccine seem bright, with no less than 170 teams in the race and even faxes in the final stage of trials.
Wall Street is growing steadily with its oil price forecasts, with Bank of America recently said raw prices are on course to reach $ 60 in the first half of 2021 when the surplus turns into a deficit.
Oil prices have not fully recovered from their pre-crisis levels, instead remaining limited to $ 40- $ 45. However, if you belong to the bull camp and believe that a major oil rally is in the cards, here are five oil and gas stocks to play handball.
# 1 Safest Dividend: Phillip 66 Texas-based Phillips 66 (NYSE: PSX) is a downstream / midstream company with stakes in 13 refineries. Most refiners have been hit hard by Covid-19 due to the weak demand for oil products, and PSX has not been spared either. The stock has been down 45% year-on-year, with peers Valero Energy Corp. (NYSE: VLO) en Marathon Oil Corp. (NYSE: MRO) lost 41.6% and 56.2%, respectively.
However, PSX has its bright side. The stock currently sports a forward dividend yield of 5.87%, with the company paying an annual dividend of 90 cents ($ 3.60 per share). With Wall Street predicting an EPS of $ 1.10 in the current year and $ 5.10 in 2021, the PSX dividend appears well covered.
Furthermore, the company recently announced plans to reconfigure its San Francisco Refinery produce sustainable fuels from soybean oil, used cooking oil, fat and fats instead of crude oil. The refurbished refinery has a planned completion date of 2024 and is set to become one of the largest innovative diesel production facilities in the world, which could prove to be a sensible move on the part of PSX’s management given the boom of ESG.
Related: Saudi oil minister: oil demand could see 97% refund after end-2020
One caveat: Although PSX has consistently paid its dividend since its 2012 spinoff of ConocoPhillips (NYSE: COP), it has failed to increase the dividend in the past six consecutive quarters.
# 2 Oil Majors: Chevron
Oil majors tend to be among the safest investments in the oil and gas sector because of their deep pockets, and Chevron Corp. (NYSE: CVX) proves the creme de la creme of the crop. CVX is down 27.3% YTD, compared to -39.2% yield by its close peer ExxonMobil (NYSE: XOM) and -37.6% by the Sector Fund for Energy Selection (XLE).
Chevron has generally maintained more modest capital investment plans over the year, proving to be a strong selling point in this era when investors demand capital discipline rather than aggressive growth. CVX was one of the first companies to cut capex when oil prices nosed and it has further austerity cuts were made as conditions continued to deteriorate, bringing its planned capital 2020 from $ 20 billion to $ 14 billion.
Wood Mackenzie, a global group for energy, sustainable, and research and consulting production for mining, has reported that Chevron Corp and Royal Dutch Shell (NYSE: RDS.A) are the most resilient to low oil prices, thanks to their robust deepwater projects and LNG, as well as less exposure to high-cost assets.
# 3 Natural Gas: The Williams Companies
Henry Hub Natural Gas Prices (USD / MMBtu)
Source: Business Insider Prices for natural gas have spike the last time, up nearly 41% in the past 30 days to trade at $ 2.42 / MMBtu, a level they last reached in November thanks to warmer-than-expected weather and growing cool demand in the United States.
However, given how volatile the natural gas market has become, it is prudent to hedge your bets here.
The Williams companies (NYSE: WMB) is an operator of pipelines and other midstream assets focusing on natural gas producers Marcellus Basin. WMB is a leader in midstream space with minimal exposure to commodity prices, as it generates almost all of its cash flows from livestock-based resources.
Related: Low prices put the brakes on Peru’s oil ambitions
Williams has continued to exhibit relatively strong performances in these difficult times, with Q2 2020 EBITDA flat at $ 1.24 B compared to a year ago after the company managed to cut costs by 24%. Although the ratio for dividend coverage fell to 1.64x versus 1.88xa years ago, it is still above the red zone and appears sustainable given the 100% fee-based cash flow structure with the majority of its customers in good standing.
WMB sports a dividend yield (fwd) of 7.34% and a low short interest rate of 1.52%.
# 4 MLPs: NuStar Energy
In a previous article we discussed how Master Limited Partnerships (MLPs) have fallen out of favor thanks to Trump’s corporate tax bonanza as well as a change in MLP tax costs for intermediate pipelines. Nevertheless, MLPs remain some of the highest dividend payers in the energy space and will therefore continue to appeal to yield-seeking investors.
One such MLP is based in San Antonio NuStar Energy (NYSE: NS). Nustar owns and operates 10,000 miles of pipeline and 75 terminal and storage facilities for the storage and distribution of crude oil, specialty liquids, and refined products.
Despite its recent cuts with a third cut, NS still sports a healthy fwd yield of 10.74% and is used only moderately, which together with the enormous 67% cut of capex, reduces the risk of extra large cuts going forward.
# 5 Fast Growing: Range Resources Corp.
Range Resources Corp. (NYSE: RRC) is a Delaware-based petroleum and natural gas exploration and production company and one of the largest exploration companies operating in the Marcellus Formation.
It is rare to find an oil and gas stock that falls into three digits in these three digits, but RRC has managed to do just that. RRC has been up 75.6% YTD and 112.4% over the past 12 months, which is remarkable for an energy company with a $ 2B market cap.
That’s the case because many investors keep a good turnaround story, and RRC seems to fit that bill. First, it was good news in late March after the company de confirmation of its $ 3B credit base, whereby fears of imminent bankruptcy are condemned. Second, time has Q2 2020 income call, RRC reported that its cost for natural gas unit had decreased to $ 1.79 per mcfe, as low as $ 0.39 per mcfe lower compared to 18 months ago, thanks to efficient use of infrastructure and streamlining operations.
With gas prices approaching $ 2.50 / MMBtu, RRC’s balance sheet now looks much stronger.
By Alex Kimani for Oilprice.com
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