The stock market has been roaring this year. Most sectors have recovered, including energy. The average energy stock in the S&P 500 has increased more than 10% this year.
Despite that rally, several energy stocks still look like attractive buys. Chevron(NYSE: CVX), MPLX(NYSE: MPLX)and Western Oil(NYSE: OXY) stand out to some Fool.com contributors as great buys right now. Here’s why they believe these energy stocks could provide investors with high-octane total returns from here.
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Ruben Gregg Brewer (Chevron): When it comes to integrated energy companies, Chevron is easily one of the elite group leading the pack. It’s big, with a market capitalization of $275 billion. It is diversified into upstream (production), midstream (pipelines) and downstream (chemicals and refining). It is financially strong, with a debt-to-equity ratio of only about 0.17 times (one of the lowest in its closest peer group). And it has a more than three-decade history of annual dividend increases.
XLE data from YCharts.
And yet it has lagged behind last year’s energy rebound and is far behind ExxonMobilits closest point of comparison in the United States. The problem is a bit unique since Chevron is trying to buy Hesseand Exxon seems to stand in the way. Exxon’s partnership with Hess on a major oil project is what is holding things up and could even derail the deal. Investors are likely acting cautiously with Chevron right now, worried that the failure of the deal will result in slower growth for Chevron. That’s not unreal.
But Chevron is not a stock that you look at in the short term but rather that you buy for the long term. Even if Exxon ruins the Hess deal, Chevron can simply change course and find another acquisition target. That may take a little time, but losing Hess won’t derail Chevron; it will just slow you down temporarily. Therefore, the stock’s lagging performance today could end up being a buying opportunity. And you’ll earn an attractive 4.2% dividend yield while you wait for all of this to sort itself out.
Matt DiLallo (MPLX): MPLX units have gained about 25% so far this year. Even with that increase, the master limited partnership (MLP) still seems as an attractive investment.
Despite the MLP’s strong rally this year, it still offers a high yield of over 8%. This is due to a combination of valuation (which is still relatively low, around 10 times earnings) and continued distribution growth. MPLX recently increased its distribution by another 12.5%, marking its third consecutive year of double-digit distribution increases.
MPLX is in an excellent position to continue growing its distribution at a healthy pace. It produces a lot of stable cash and has a conservative payout ratio. gender barely enough cash through the first nine months of this year to cover its distribution, capital expenditures and a couple of acquisitions. And it has a cash-rich balance sheet with a minimum of 3.4 times leverage ratio (well below the 4.0 times its stable cash flows could support).
MLP is investing to continue expanding its presence in the midstream, which increasing your capacity and cash flow. The company has several projects underway, which gives it visibility of its growth until 2026.
MPLX is the complete package for investors. It offers an attractive combination of income and growth at a reasonable valuation. That’s why it still looks like a great buy right now for those who are comfortable investing in an MLP, sending investors a Federal Tax Form Schedule K-1 every year.
Neha Chamaria(Western Oil): Occidental Petroleum shares have lagged badly this year, trading down 15% in 2024 at the time of writing. Investors may have been concerned about the impact of the recent drop in oil prices on a debt-laden company, but they may be overlooking Occidental Petroleum’s latest move. The oil and gas giant is doing what it should: increasing cash flows and paying down debt, making Occidental stock the kind of stock you’d want to buy while the opportunity lasts.
Occidental just reported strong earnings for its third quarter despite a drop in raw material prices, thanks in part to higher production driven by a recent acquisition. Occidental acquired CrownRock in August for about $12 billion, including debt, and expected the acquisition to immediately boost its cash flows. In the third quarter, Occidental generated its highest operating cash flow so far this year.
More importantly, Occidental committed to divest assets and pay down debt worth about $4.5 billion a year from acquiring CrownRock. The company is off to a great start, paying down $4 billion in debt in the third quarter alone, just two months after closing the acquisition.
Thanks to CrownRock, Occidental raised its full-year production guidance for the Permian Basin, so I expect the company to continue generating strong cash flows and reduce debt. A strong balance sheet is perhaps a commodity stock’s greatest strength, and Occidental is slowly but surely getting there.
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Matt DiLallo has positions at Chevron. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Energy Stocks Have Soared This Year, But These Three Still Look Like Great Buys originally posted by The Motley Fool
