By Alex Kimani
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 staged a nice recovery to trade at five-month highs.
Optimism is slowly returning to the oil markets thanks to the deep OPEC+ cuts and the latest report that shows producers have mostly been sticking to their pledged cuts. Meanwhile, the prospects of finding a Covid-19 vaccine appear bright, with no less than 170 teams in the race and even vaccines in the final stage of trials.
Wall Street is growing increasingly bold with its oil price prognostications, with Bank of America recently saying crude prices are on track to hit $60 during the first half of 2021 as the oversupply flips into a deficit.
Oil prices have failed to retrace their pre-crisis levels fully, instead remaining range-bound at $40-$45. However, if you belong to the bull camp and believe a big oil rally is in the cards, here are five oil and gas stocks to play the rebound.
#1 Safest Dividends: Phillip 66 Texas-based Phillips 66 (NYSE:PSX) is a downstream/midstream company with stakes in 13 refineries. Most refiners have been badly hit by Covid-19 due to weak demand for oil products, and PSX has not been spared, either. The stock is down 45% in the year-to-date, with peers Valero Energy Corp. (NYSE:VLO) and Marathon Oil Corp. (NYSE:MRO) having lost 41.6% and 56.2%, respectively.
Nevertheless, PSX has its bright side. The stock currently sports a forward dividend yield of 5.87%, with the company paying a 90 cents quarterly dividend ($3.60 per share annually). With Wall Street predicting an EPS of $1.10 in the current year and $5.10 in 2021, PSX’s dividend appears well covered.
Further, the company recently announced plans to reconfigure its San Francisco Refinery to produce renewable fuels from soybean oil, used cooking oil, fats, and greases rather than from crude oil. The converted refinery has a planned completion date of 2024 and is set to become one of the world’s largest renewable diesel production facilities, which could prove to be a wise move on the part of PSX’s management given the ESG boom.
One caveat: Although PSX has consistently paid its dividend since its 2012 spinoff from ConocoPhillips (NYSE:COP), it has failed to increase the dividend over the past six consecutive quarters.
#2 Oil Majors: Chevron
Oil majors tend to be among the safest investments in the oil and gas sector due to their deep pockets, and Chevron Corp. (NYSE:CVX) is proving to be the creme de la creme of the crop. CVX is down 27.3% YTD, compared to -39.2% return by its close peer ExxonMobil (NYSE:XOM) and -37.6% by the Energy Select Sector Fund (XLE).
Chevron has generally maintained more modest capital investment plans over the year, which is proving to be a strong selling point in this era when investors are demanding capital discipline rather than aggressive growth. CVX was among the first companies to cut capex when oil prices nosedived and it has made further spending cuts as conditions continued to deteriorate, thus taking its planned 2020 capex from $20 billion to $14 billion.
Wood Mackenzie, a global energy, renewables, and mining research and consultancy group, 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
Source: Business Insider Natural gas prices have been spiking lately, up nearly 41% over the past 30 days to trade at $2.42/MMBtu, a level they last touched in November thanks to warmer-than-expected weather and increasing cooling demand across the United States.
Nevertheless, 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 with a focus on the Marcellus Basin natural gas producers. WMB is a leader in the midstream space with minimal exposure to commodity prices since it generates nearly all of its cash flows from fee-based sources.
Williams has continued to exhibit relatively strong performance during these troubled times, with Q2 2020 EBITDA flat at $1.24B compared to a year ago after the company managed to cut costs by 24%. Although the dividend coverage ratio fell to 1.64x vs. 1.88x a year ago, it is still above the red zone and appears sustainable given its 100% fee-based cash flow structure with the majority of its customers in good condition.
WMB sports a dividend yield (fwd) of 7.34% and a low short interest of 1.52%.
#4 MLPs: NuStar Energy
In a past article, we discussed how Master Limited Partnerships (MLPs) have been falling out of favor thanks to Trump’s corporate tax bonanza as well as a change in the MLP tax costs for interstate pipelines. Nevertheless, MLPs remain some of the highest dividend payers in the energy space and will therefore continue to appeal to yield-chasing investors.
One such MLP is San Antonio-based 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 recently cutting its distributions by a third, NS still sports a healthy fwd yield of 10.74% and is only moderately leveraged, which coupled with the huge 67% capex cut, lowers the risk of additional big cuts going forward.
#5 Fastest-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 is up in triple-digits during this crisis, but RRC has managed to do just that. RRC is 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 is the case because many investors love a good turnaround story, and RRC appears to fit that bill. First was the good news in late March after the company announced the reaffirmation of its $3B credit base, thus assuaging fears of looming bankruptcy. Second, during its Q2 2020 earnings call, RRC reported that its natural gas unit cost had declined to $1.79 per mcfe, or $0.39 per mcfe lower compared to 18 months ago thanks to efficient utilization of infrastructure and streamlining operations.
With gas prices approaching $2.50/MMBtu, RRC’s balance sheet now looks much stronger.