Elliott Gue, cofounder of the investment-publishing company Capitalist Times, McLean, Virginia, and co-editor of the Energy & Income Advisor newsletter. CapitalistTimes.com
The death of fossil-fuel companies has been greatly exaggerated. For much of the last decade, oil-and-natural-gas stocks were on life support with negative total returns.
But recently, oil prices have skyrocketed as the global market felt the effects of less Russian oil and natural gas flowing to the West. At press time, Russia’s invasion of Ukraine had the potential to spin out of control, compromise Russian oil exports and destabilize global supplies. Those diminished supplies and soaring prices would have grave consequences for the US stock market and economy—but would benefit many energy stocks, which already have taken off, up 41%* over the past year versus just 6% for the S&P 500 Index.
Energy expert Elliott Gue says it’s not too late for investors to join this powerful rally. What’s more, he believes that, despite warnings about global warming and climate change, alternative energy has decades to go before it renders oil and natural gas obsolete.
His prediction: For the next several years, oil prices are likely to remain high and old-economy energy stocks will emerge as lucrative investments and the new market leaders.
Investors need to consider exposure to these long-disregarded stocks because the highest inflation in decades and rising interest rates are likely to depress the returns of popular market sectors such as technology. For income seekers wary of pricey dividend stocks, many energy companies still are relatively cheap and offer steady yields of 3% or higher.
Bottom Line Personal asked Elliott Gue to explain how oil and gas became hot commodities after a long lull and the best stocks to play in the resurgence.
Oil and natural gas are deeply cyclical industries with long periods of busts and booms based on imbalances in supply and demand. For much of the last decade, oil prices have been in a bear market, dropping as low as $20/barrel. That’s because the sluggish global economy suppressed demand for fossil fuels at the same time that US shale producers were flooding the world with oversupply.
That changed dramatically last year as the fading pandemic and geopolitics created a perfect storm for fossil fuels. The US and other economies posted their strongest growth in gross domestic product (GDP) in decades. Demand for oil soared. The glut quickly dissipated, and prospects of a shortage in global oil supplies when Russia invaded the Ukraine briefly pushed oil to $130/barrel, the highest it has been since 2008.
Now, it’s likely that the world will experience supply shortfalls for an extended time. The ability to add capacity right away just isn’t there because, until recently, major oil companies had little incentive to invest in drilling new wells and developing fresh oil fields. In fact, US crude output in 2022 will average a half million barrels a day below its 2019 levels. Even OPEC has found that once output has been reduced, it is not easy to bring it back online rapidly.
Upshot: We’re in an exceptional boom cycle in which oil could trade in the $80-to-$100 range for the next several years. And despite last year’s outperformance of energy stocks, the energy sector of the S&P 500 Index still is dirt cheap with a price-to-earnings ratio of just 12 versus 19.6 for the index overall.
Surging demand for oil and natural gas and higher prices will buoy the fortunes of these five companies and one exchange-traded fund (ETF)…
Enterprise Products Partners (EPD) owns 50,000 miles of gas and oil pipelines across the US. The company’s long-term contracts with energy producers to transport their fossil fuels and its dominant presence in major shale basins across the US result in strong, utility-company–like cash flows, ideal for income investors. Enterprise has raised its dividend every year since its 1998 IPO, including a hike during last year’s pandemic slowdown. This year, rising demand for oil transport will allow the company to expand its pipeline networks and increase its cash distributions by more than 3% over last year. Note: Enterprise is structured as a master limited partnership (MLP)—its shares trade like stocks so the company is able to avoid corporate taxes by passing most of its income to investors in the form of dividends. MLPs offer hefty yields, but that comes with more complicated tax issues for investors than ordinary stock. Recent yield: 7.38%. Recent share price: $24.58.
Exxon Mobil Corp. (XOM). Unlike many of its peers, Exxon Mobil chose to invest billions of dollars in new oil-exploration projects over the past decade instead of developing renewable-power businesses. That decision alienated environmentally oriented investors and hurt the stock price. Exxon Mobil even was removed from the Dow Jones Industrial Average Index after nearly a century (replaced by software giant Salesforce.com). But in 2021, the oil giant posted its highest annual profit since 2014 and is expected to do even better this year as its new deep-water oil field off the coast of Guyana comes fully online. Recent yield: 4.15%. Recent share price: $81.88.
Pioneer Natural Resources (PXD). With Pioneer’s recent acquisition of DoublePoint Energy, the shale-oil-and-gas producer has become the largest oil producer in the Permian Basin in West Texas with more than one million acres. The company is so efficient that it can meet all its cash-flow needs as long as oil sells for at least $30/barrel. This year, Pioneer expects to spend $4 billion in excess cash buying back company shares, as well as pay a cash dividend yield as high as 7%, or possibly higher. Recent yield: 2.37%. Recent share price: $229.34.
Schlumberger Ltd. (SLB). The world’s largest oil-services company supplies machinery and technology, which helps energy companies in more than 120 countries drill new wells, increase flow from existing oil fields and trim production costs. For the past five years, the Houston-based company has grown by expanding its operations in Asia and the Middle East. It also has expanded into artificial-intelligence services, using software to monitor data from rigs and oil fields to make sure equipment is operating smoothly and providing maintenance alerts to limit potential breakdowns. Recent yield: 1.17%. Recent share price: $41.55.
Valero Energy (VLO) operates dozens of plants that refine and process crude oil to create everything from jet fuel to ethanol to diesel gasoline. Many of those refineries are along the Gulf Coast of Texas and Louisiana, well-positioned to meet the booming export industry to Latin America and Europe. Valero also is the world’s second-largest producer of sustainable renewable diesel fuel. Using recycled animal fats and used cooking oil, it produces low-carbon fuel that reduces greenhouse-gas emissions up to 80% versus traditional diesel. Recent yield: 4.28%. Recent share price: $90.55.
For investors who don’t want to own individual stocks…
The Energy Select Sector SPDR Fund (XLE), which has risen 46% in the past year, passively tracks the performance of the 21 large-cap energy stocks—mostly old-economy companies in the oil, coal and natural gas industries—in the S&P 500 Index. The fund’s two top holdings—Exxon Mobil and Chevron—make up about 45% of its portfolio. The fund owns all of the stocks listed above except for Enterprise Products Partners (which the S&P categorizes as a utility company). Its annual expense ratio is just 0.1%, and it recently offered a yield more than twice that of the S&P 500. Recent yield: 2.84%. Recent share price: $74.55.