The stock market is buzzing this year. Most sectors have recovered, including the energy sector. The average energy supply in the S&P500 has risen more than 10% this year.
Despite this rally, several energy stocks still look like attractive buys. Chevron(NYSE: CVX), MPLX(NYSE: MPLX)And Western petroleum(NYSE:OXY) stand out to a few Fool.com contributors as great buys right now. This is why they think these energy stocks can offer investors high-octane total returns from here.
Start your morning smarter! Wake up with Breakfast news in your inbox every market day. Register for free »
Ruben Gregg Brouwer (Chevron): When it comes to integrated energy companies, Chevron is easily among the elite group leading the way. It’s big, with a market cap of $275 billion. It is diversified across the upstream (manufacturing), 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 among its closest peer group). And it has a history of more than three decades of annual dividend increases.
XLE data by YCharts.
And yet the country has lagged behind in last year’s energy rally and is still far behind ExxonMobilthe closest US comparison point. The problem is a bit unique because Chevron is in the buying business Hesand Exxon seems to be standing in the way. Exxon’s partnership with Hess on a major oil project is holding things back and could even derail the deal. Investors are likely being cautious about Chevron at the moment, fearing that the deal’s failure would result in slower growth for Chevron. That is not unrealistic.
But Chevron is not a stock you look at for the short term, but a stock you buy for the long term. Even if Exxon messes up the Hess deal, Chevron can simply switch gears and find another takeover target. That may take some time, but the loss of Hess won’t derail Chevron; it will only slow it down temporarily. So today’s lagging stock performance could be a buying opportunity. And you’ll get an attractive 4.2% dividend yield while you wait for this all to resolve.
Matt DiLallo (MPLX): Units of MPLX are up about 25% so far this year. Even with that increase, the master limited partnership (MLP) still looks as an attractive investment.
Despite the MLP’s stellar rally this year, it still offers high returns of over 8%. This is due to a combination of valuation (which is still relatively low at around ten times earnings) and continued distribution growth. MPLX recently increased its distribution by another 12.5%, marking the third straight 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 money and has a conservative payout ratio. It generated about enough cash through the first nine months of this year to cover distribution, capital expenditures and a few acquisitions. And it has a cash-rich balance sheet, at a low 3.4 times leverage ratio (well below the 4.0 times that stable cash flows could support).
The MLP is investing to further expand its midstream footprint, that is increasing capacity and cash flow. The company has several projects underway, which makes it… insight into growth until 2026.
MPLX is the complete package for investors. It offers an attractive combination of income and growth at a reasonable valuation. Therefore, it still seems like a great buy right now for those who feel comfortable investing in an MLP, which gives investors a Schedule K-1 federal tax form every year.
Neha Chamaria(Western petroleum): Shares of Occidental Petroleum have been a big laggard this year, trading 15% lower in 2024 at the time of writing. Investors may be concerned about how the recent drop in oil prices will impact a company saddled with debt, but perhaps they overlook Occidental Petroleum’s latest move. The oil and gas giant is doing what it’s supposed to do: boost cash flow and pay down debt, making Occidental stock the kind of stock you’d want to buy while the opportunity presents itself.
Occidental just reported strong third-quarter earnings despite a drop in commodity prices, thanks in part to higher production from a recent acquisition. Occidental acquired CrownRock in August for about $12 billion, including debt, and expected the acquisition to be immediately accretive to cash flows. In the third quarter, Occidental achieved its highest operating cash flow so far this year.
More importantly, Occidental has committed to divesting assets worth approximately $4.5 billion and paying down debt within a year of acquiring CrownRock. The company is off to a great start, paying back $4 billion in debt in the third quarter alone, within just two months of closing the acquisition.
Thanks to CrownRock, Occidental has increased production guidance for the Permian Basin for the full year, so I expect the company to continue generating strong cash flows and deleveraging. A strong balance sheet is perhaps the biggest asset of a commodity stock, and Occidental is slowly but surely getting there.
Before you buy shares in Chevron, consider the following:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Chevron wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $870,068!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. TheStock Advisoris on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns November 11, 2024
Matt DiLallo has positions in 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 holds positions in and recommends Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Energy Stocks Have Soared This Year, But These 3 Still Look Like Great Buys was originally published by The Motley Fool
