As the bull market sails past its first decade, value-minded investors worry that there are few bargains left. But there are, if you're willing to wade into the oil patch. The big problem is finding the courage. Even some of the best energy stocks have suffered recent returns reminiscent of the Deepwater Horizon.
Oil-focused stocks naturally are subject to the price of oil, which depends, in part, on Middle East politics, the global economy and U.S. driving habits. Oil prices (as well as natural gas and other energy sources) also depend on supply, and oil has been plentiful, thanks to the revolution in fracking.
Over the past 12 months, West Texas intermediate crude oil has seen its price fall to about $57 from $74 a year earlier. This is particularly bad for energy stocks that explore and drill for oil, known as upstream companies. For companies that refine oil into gasoline and other products, however, lower prices can be good, since oil is a cost to them, rather than a product.
Will the energy sector find relief in 2020? So far, the experts aren't hopeful. The International Agency Energy says that oil supplies could be rich once again thanks to a pickup in production and tepid growth in demand. That bodes poorly for prices.
If you're still willing to brave a potentially difficult sector, however, here are 10 of the best energy stocks to buy for 2020.
Cabot Oil & Gas
Market value: $6.8 billion
Dividend yield: 2.4%
12-month total return: -33.7%
We'll pass on the gas jokes here, but Cabot Oil & Gas (COG, $16.69) produces roughly 2.4 billion cubic feet of natural gas equivalent per day, primarily from the Marcellus Shale formation in Appalachia.
The problem? Natural gas prices have fallen by about 30% in the past year, to about $2.33 per thousand cubic feet currently. That helps explain most of the stock's tumble.
Indeed, COG is a pure play on natural gas. It's also a contrarian bet; there's plenty of negative sentiment swirling this stock. Nevertheless, it's dirt cheap. The stock's 12-month price-to-earnings ratio (P/E) is at a five-year low, and its forward-looking P/E, based on estimates for next year's profits, is a still-muted 12.8. Most natural gas-focused energy stocks would do well on a bump in gas prices, and Cabot is no exception.
Market value: $42.8 billion
Dividend yield: 1.6%
12-month total return: -26.1%
EOG Resources (EOG, $73.52) is all about shale, which generally means it's fracking: the process of extracting oil through injecting water and chemicals into horizontal shafts. Roughly 90% of its output is from the U.S. - including significant holdings in the Permian Basin - with the rest coming from Trinidad and Tobago, the United Kingdom, China and Canada.
The company focuses buying premium oil and gas properties and maximizing returns on its wells. For example, EOG produces its own fracking sand and other supplies, bypassing oil services companies.
As with most oil and gas companies, lower prices had EOG's third-quarter earnings pumping mud. Its net income plunged 40% year-over-year to $615 million. At the same time, however, the company's crude oil output increased 12% and its natural gas and liquids volume rose 11%.
EOG's price looks decent, at 15 times forward earnings estimates. And Susquehanna's Biju Perincheril is bullish about the company's ability to grow free cash flow (FCF) - the cash profits a company generates annually after making the capital expenditures necessary to maintain the business - over the next couple years. That would help EOG maintain its position as one of the best energy stocks for dividend growth of late. It has hiked its payout thrice since early 2018, including a hefty 31% upgrade in May 2019.
As with most of the exploration and production plays on this list, EOG stock should soar if oil prices do rebound.
Market value: $45.2 billion
Dividend yield: 5.0%
12-month total return: 26.2%
Kinder Morgan (KMI, $19.96) is riding the hydrocarbon highway. It operates or owns an interest in approximately 84,000 miles of pipelines that transport oil, natural gas, gasoline, oil and carbon dioxide, and it has 153 terminals for distributing all of those. KMI also owns interests in some oil fields and gas processing plants.
As the largest pipeline company in the U.S., Kinder Morgan has plenty of cash for capital improvements, as well as boosting its dividend in future years. It has a virtual monopoly on transporting carbon dioxide, too, which is used to enhance oil recovery from existing wells.
At 19 times next years' estimated earnings, it's more expensive than many energy stocks, but not outrageously so. It's also a strong income play - not just because of the 5% yield, but also dividend growth potential. KMI raised its payout from 80 cents annually (paid quarterly) to $1, and Morningstar expects Kinder Morgan's dividend to reach $1.25 per share by the end of next year.
Pioneer Natural Resources
Market value: $21.7 billion
Dividend yield: 1.4%
12-month total return: -10.4%
Pioneer Natural Resources (PXD, $131.08) is a direct play on the Permian Basin, where the dinosaurs that once roamed the earth now power our vehicles.
The Permian, in the Southwest, is one of the largest oil-producing regions in North America. And its production has grown as fracking has grown. Pioneer has about 200,000 drilling locations there, and many of those were acquired relatively cheaply in the 1990s before the fracking boom, Morningstar director Dave Meats says.
PXD currently sells for 15 times its estimated earnings, compared with energy stocks' forward P/E of 20. Part of this reflects the generally gloomy outlook for oil: Much of the global economy is slowing, but oil supply is expanding, largely due to American fracking. The U.S. Energy Information Administration estimates that West Texas Intermediate crude oil will average $55 per barrel in 2020, down from the 2019 average of $56 per barrel.
At current oil prices, Pioneer's stock looks like a bargain. If there's a steep decline in oil, however, the stock will stay that way.
Market value: $291.4 billion
Dividend yield: 5.0%
12-month total return: -4.3%
You want oil? The nation's biggest oil company, Exxon Mobil (XOM, $68.91) will give you exploration and production, and refined products, too. The company is planning to boost spending on plants and equipment - a particular boost for refined products - and has added to its oil output through discoveries in Guyana and acquisitions in the Permian Basin and Mozambique.
The company's third-quarter earnings would make the toughest oilman cry. Profits fell to $3.2 billion from $6.2 billion in the year-ago period, led by its upstream sector (drilling and production). Unusually, earnings from its downstream sector - chemicals and other refined products - fell, too.
But you can make gasoline from oilmen's tears. The energy stock yields a robust 5.0% and trades for a modest forward P/E of 18.
Market value: $223.8 billion
Dividend yield: 4.0%
12-month total return: 8.5%
Chevron (CVX, $118.38), the second-largest integrated oil company in the S&P 500, has a lower dividend yield than rival Exxon Mobil. But its stock is in the black for the past year - something XOM can't claim.
Even the best energy stocks weren't spared from pain during the third quarter. Chevron's profits tumbled 35% year-over-year to $2.6 billion. Nevertheless, CVX has generated plenty of free cash flow. Plenty of free cash flow means the company can raise its dividend, buy back stock or invest in more equipment.
Chevron typically relies on its oil production more than its refined products to generate profits, and that's still the case. It expects production growth in the 4% to 7% range this year. Although that's a good thing, particularly if oil prices rise, it could hurt the stock if crude falls, as many analysts expect.
Market value: $40.0 billion
Dividend yield: 3.7%
12-month total return: 31.9%
Valero Energy (VLO, $97.35) is one of the world's largest petroleum refiners, with 15 refineries in the U.S., Canada and the United Kingdom with capacity of 3.1 million barrels per day. The company has 14 ethanol plants that produce more than 1.7 billion gallons a year.
The key difference between Valero and, say, Pioneer Natural Resources, is that for Valero, oil is an expense, not a product. When oil prices go down, Valero does a little happy dance, because their costs have fallen. When oil prices rise, however ...
Of late, though, Valero has had plenty of reason for cheer, with one asterisk: Corn prices have been rising, which cut profits at its ethanol division, where operating earnings swung to a $43 million loss in the third quarter from a profit of $21 million 12 months earlier.
Still, if you're counting on lower oil prices in the future, VLO is among the cheapest energy stocks to buy at the moment. It's trading for just less than 10 times forward earnings estimates, and you're being paid 3.7% to wait for higher prices.
Market value: $51.2 billion
Dividend yield: 5.5%
12-month total return: -15.7%
If you're exploring for oil or gas, you probably have Schlumberger (SLB, $37.08) on speed dial. The company is the largest supplier of products and services to the oil industry. Schlumberger has 105,000 employees operating in 120 countries, and is increasingly specializing in lowering the cost of extracting oil.
Thanks to punk oil prices, however - and a $12.7 billion pretax writeoff in the most recent quarter - Schlumberger is in the bargain bin, too. Its dividend is extremely generous as a result; at 5.5%, it's among the best-yielding energy stocks.
Its forward P/E of about 21 is a bit on the high side, but it also represents a considerable improvement. That's because its trailing P/E doesn't exist - it was unprofitable over the past 12 months, and good luck trying to divide by zero.
SLB also sits in the portfolio of dedicated value funds such as Dodge & Cox Stock (DODGX), MFS Value (MEIAX) and Vanguard Windsor II (VWNFX).
Market value: $113.7 billion
Dividend yield: 2.1%
12-month total return: 34.4%
NextEra Energy (NEE, $232.56) actually belongs to the utility sector, though it's something of a hybrid. It's a regulated utility, but one with a rapidly growing solar-and-wind energy component, along with a couple other smaller businesses.
Its utility component, which includes Florida Power & Light and Gulf Power, serves more than 5 million customers in Florida. The energy arm, NextEra Energy Resources, boasts 21,000 megawatts of electric generating capacity, and is the world's top generator of solar and wind energy, and also is a leading battery energy storage provider at more than 140 megawatts.
NextEra is a good play for investors who want to invest both in the growth of renewable energy and the safety of the utility sector.
For instance, the company's third-quarter utility earnings from Florida Power & Light were $683 million, a 4.4% bump higher from the year-ago period. Its energy component, meanwhile, saw adjusted net income jump 22.5% to $424 million.
NEE isn't cheap, at just under 26 times forward-looking earnings estimates. But it represents an excellent combination of income and growth thanks to its utility and alternative energy arms.
Market value: $67.0 billion
Dividend yield: 2.8%
12-month total return: -2.2%
ConocoPhillips (COP, $61.05) is the world's largest independent oil-and-gas exploration and production company. It produced just less than 1.3 million barrels of oil equivalent per day in 2018, and had 5.3 billion barrels of oil equivalent. It operates in 17 countries, including all across the U.S., and has large holdings of unconventional energy sources, both onshore and offshore.
COP shares currently sell for a little more than 17 times forward-looking earnings. ConocoPhillips also has been an aggressive purchaser of its own shares; it spent $750 million on stock buybacks during the third quarter alone, and it plans to buy $3 billion worth of shares in 2020.
The biggest danger is a collapse in oil prices, and it's not out of the question. The company slashed its dividend by 66% in 2016 in response to the energy-price crash in 2014-15. However, the payout has been back on the rise since 2017, including a 38% improvement in October. And a rebound in oil prices should make COP a fine stock to hold.