After several years of weak demand and falling prices, the oil sector has regained its footing, stabilizing above the key $50 per barrel level. For investors seeking to energize their portfolios, 10 MoneyShow.com contributors offer their top ideas in the energy sector, including opportunities in oil, natural gas, oil services and energy infrastructure.

 

John Buckingham, The Prudent Speculator

Total (TOT) is one of the world’s largest integrated oil and gas companies, with operations in exploration and production, refining and marketing, and chemicals.

In its third quarter, Total took advantage of improving oil prices and strong demand for petroleum products, reporting an increase of 29% in underlying year-over-year profits. Upstream production grew 6% with project ramp-ups and portfolio additions in Qatar and the Barnett Shale.

Hurricane Harvey had a net positive effect on the refining segment, as shutdowns hurt total refined volumes, but higher demand of petroleum products benefited margins.

We like that Total’s production costs are meaningfully lower than most of its large integrated peers and that those costs should continue to drop over the next few years.

Almost half of Total’s production in 2020 is projected to come from long-plateau production projects like LNG, which should reduce decline rates and reinvestment necessary to maintain future production levels. Respective consensus EPS estimates (in U.S. dollars) for 2018 and 2019 reside at $4.27 and $4.61, while the net dividend yield is 4.4%.

 

Chloe Jensen Lutts, Cabot Dividend Investor

ONEOK (OKE) is a natural gas pipeline and midstream processing company that boasts an unusually strong dividend history for a high-yield stock. It has over 38,000 miles of natural gas and natural gas liquids (NGL) pipelines, running from North Dakota to Texas and from Kansas to Illinois.

ONEOK has invested $9 billion in its network over the past decade, and continues to steadily add processing capacity, well connections and pipeline miles. Major drivers of growth this year and next will be the addition of almost 400 new well connections in the Williston Basin and the expansion of processing capacity in Oklahoma.

ONEOK has paid dividends consistently since 1989, and has increased the dividend every year since 2003. Over the past five years, dividend increases have averaged 18% per year. Through 2021, management is targeting 9% to 11% dividend growth per year.

Almost 90% of ONEOK’s earnings are fee-based, meaning they don’t depend on natural gas prices (though prices can affect production levels).

ONEOK just reported earnings that beat expectations.

Revenues rose 23% year-over-year, beating expectations by $280 million, while EPS beat by one cent. Third-quarter net income hit $165.7 million, thanks to a 16% increase in processing volumes and 5% growth in gas and NGLs transported.

 

Scott Chan, Real World Investing

We are adding EOG Resources (EOG) to our model portfolio; the fracking company owns significant acreage in the Permian and Eagle Ford basins, two key shale basins. The Permian is especially productive and is the lowest-cost tight-oil basin in the U.S.

Its technical excellence and having its own midstream infrastructure enables it to operate cheaply enough that breakeven is believed to be achievable even if oil fell to $30 per barrel.

The company is known for utilizing data-driven methods to increase operational efficiencies and it’s among the leaders in using artificial intelligence (AI) to pinpoint the best drilling locations.

AI techniques such as machine learning are used to synthesize data and optimize the capital-intensive exploration and production processes. Such techniques allow companies to utilize real-time data insights to identify patterns, predict critical outcomes and make smarter business decisions.

Frackers are under pressure to operate more efficiently than ever before. We expect EOG’s superior technological expertise will continue to position the company as industry innovator and leader for years to come. We consider the stock the cream of the crop among fracking operators.

 

Elliott Gue, Energy & Income Advisor

Occidental Petroleum Corp. (OXY) tends to hold its value reasonably well during selloffs. Management reiterated its commitment to maintaining the dividend over the near term and the payout over the intermediate term.

Occidental Petroleum boasts an impressive footprint throughout the Permian Basin. The company continues to run rigs in the Texas portion of the Delaware Basin and the Midland Basin. It also has a substantial acreage position in the Permian Basin that hasn’t been evaluated, creating the potential for additional inventory upside as other operators delineate nearby assets.

Occidental Petroleum exhibits many of the qualities we prize in an exploration and production company: a strong balance sheet (a leverage ratio of 2.39 times and $2.2 billion in cash), franchise assets in the Permian Basin and steady cash flow from conventional fields.

These advantages give the company valuable optionality to ramp up drilling and completion activity or return cash to shareholders via dividends or stock repurchases. The stock looks like a good bet on potential upside in oil prices and further rotation into value names.

 

Jason Williams, Angel Publishing's Energy & Capital

Energy stocks are some of the most reliable income-generating investments. Let’s take a look at a few that will pay you income and boost your profits for years to come.

Williams Partners L.P. (WPZ) is a solid, high-yielding master limited partnership. An energy infrastructure company, it’s got a hand in pretty much every part of the oil and gas life cycle. It helps producers gather, treat, and compress newly recovered oil and gas.

And it pays investors a very nice 6.09% quarterly payment. You’re not going to get blazing rallies in the stock, but you can depend on those payments hitting your bank account every three months, no matter what.

Next up, let’s go with a dividend grower. ExxonMobil (XOM) has one of the longest-running dividend programs in the market. It’s been paying investors steady income for more than a century.

The company has also been raising that dividend payment every year for the past 35. That’s just what you want in your energy income portfolio. The stock currently has a 3.74% yield.

Finally, the Energy Select SPDR Fund (XLE) gives you investments in 33 different dividend-payers in the energy market, including exploration and production companies, midstream transport companies and refiners.

And the best part is that you get to collect a dividend yield that’s a combination of all 33 of those payments; the fund yields 5.06%. And it’s been paying those quarterly distributions since the fund’s inception in 1999.

 

Crista Huff, Cabot Undervalued Stocks Advisor

Schlumberger (SLB) is a premier oilfield equipment and services company with a global footprint. It uses innovative technologies in the areas of drilling, production and processing in the oil and gas industry. It creates value for its clients by lowering the cost-per-barrel of energy development.

Wall Street’s consensus estimates project Schlumberger and its main competitors to each experience significant margin expansion in 2018 and 2019.  

With a price to earnings multiple of 45.9, the stock is overvalued based on 2017 earnings. However, the stock's 2018 P/E is 29.7, much lower than its corresponding earnings per share growth, making the shares distinctly undervalued in the coming year.

Many energy stocks are having a great year. Oilfield services companies typically lag their sector peers, with many such stocks bottoming more recently and now on an upswing.

The stock fell dramatically in 2014 and 2015 when the price of oil plummeted, bottoming in early 2016. The stock then rose tremendously through December 2016, only to give back most of its gains this year.

At this point, the stock is rising. There’s 22% upside, plus dividends. Even at that point the shares will still be undervalued. This large cap stock could appeal to traders, longer-term growth investors and dividend investors. We rate the stock a Strong Buy.

 

Jack Adamo, Insiders Plus

At first glance, the latest earnings report from offshore contract driller Ensco PLC (ESV) looked awful, but closer examination revealed a much more optimistic picture.

Ensco’s work is contracted a year or more in advance, with a specified number of drilling days and rates. So, 2016 still had revenues from contracts initiated before the huge oil glut and price collapse.

It was only when those contracts expired that the true weight of the downturn was felt. We may now have seen the trough of that trend, as Ensco has closed on more new contracts than any offshore driller year to date.

Year after year, Ensco has gotten the highest customer ratings in the industry for safety and satisfaction. The new contracts show that Ensco remains the driller of choice among customers. It now has $3.2 billion in contracted backlog, excluding possible extensions.

Meanwhile, with a net debt to capital ratio of just 30%, the balance sheet is probably the strongest in the industry. It currently holds almost a billion in cash and cash equivalents. I’m now satisfied that the worst is over for Ensco. Given its growing contract backlog and strong balance sheet, I think it’s likely that money put into the stock at this time will be a good investment.

 

Yiannis Mostrous, Capitalist Times

On a price-to-book metric, the energy sector trades at a 50 percent discount to its 20-year average. That makes energy the cheapest sector in the emerging markets universe. Meanwhile, Asia remains our favorite region, both for the short-term and the long-term.

CNOOC (CEO) is the largest offshore oil and natural gas firm in China focused on offshore upstream operations. CNOOC also has a significant presence in Canada, Nigeria, Australia, Argentina and Indonesia. It has a dominant position in natural gas, which represents 35 percent of its energy reserves.

For years, the company has been focused on growing reserves and production. Recently, though, management seems to understand that if CNOOC is to be viewed at par with its global peers, a focus on profitability and efficiency is needed.

Further, company officers make clear that CNOOC will use all available tools (e.g., a clearer dividend policy) to maximize shareholder value. Among the three main oil companies in China, CNOOC offers the biggest upside because of its strong balance sheet, free cash flow generation and global operations.

 

Bob Ciura, Wyatt Research's Daily Profit

The steep decline in commodity prices since 2014 has led to huge losses and dividend cuts across the industry. However, Royal Dutch Shell (RDS.A) has been a pillar of stability and it maintained its hefty dividend even when oil prices fell below $30 per barrel.

Royal Dutch Shell cut more than $20 billion from its capital spending budget in the past three years. It has also reduced operating costs by over 20% in that time. Its efforts to raise cash during the downturn have resulted in a leaner, more efficient company. It has also strengthened its balance sheet by reducing debt by $9 billion.

Now that oil prices are rising again, the company has returned to growth. Profits soared to over $5 billion in the first half of 2017, up from $1 billion in the same six-month period last year.

Shell has completed multiple large projects, which have started to ramp up this year. By the end of 2018, the company expects its recently completed projects to cumulatively add $10 billion of new, annual cash flow. While U.S. oil stocks typically have dividend yields of 2% to 4%, Shell’s 6% dividend yield is an attractive payout for income investors.

 

Tim Plaehn, Investors Alley’s The Market Cap

A bit of the MLP sector should constitute a core part of any serious high-yield investor’s portfolio. MLPs will not only continue earning a steady stream of income but could very well enjoy considerable share price appreciation.

Targa Resources (TRGP) engages in midstream services such as gathering, processing and storing natural gas and crude oil. In February 2016, to simplify the business structure, Targa Resources acquired all the outstanding common units of Targa Resources Partners LP (NGLS) that it did not already own.

The company continues to operate using the MLP model, but is a corporation. The shares currently yield 9.0%.

Enterprise Products Partners LP (EPD) has a market cap more than $50 billion and is the largest MLP by enterprise value. The company’s business segments include natural gas pipelines and services.

Enterprise has increased its distribution for 62 straight quarters. Unlike most MLPs, Enterprise Products Partners can fund most of its growth projects without issuing additional equity. The shares yield 6.9%.

Valero Energy Partners LP (VLP) provides pipeline, storage and terminal services to its sponsor, Valero Energy Corporation (VLO). Through asset drops from Valero, the cash flow and distribution growth at Valero Energy Partners is very predictable.

The payments to investors will grow 25% in 2017 and at least by 20% in 2018, with high probability for 20% growth in future years. The units currently yield 4.7%.

 

 

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